As the Legislature considers the next state budget, it’s important to evaluate current policies.
One of the most significant recent tax policies has been the manufacturing and agriculture credit. Phased in from 2013-2016, the credit has greatly reduced the tax burden on manufacturing and agricultural businesses — crucial sectors employing one in five workers in the state.
The credit has always been controversial, in part because it costs the state money. The lost tax revenue is apparent, but the credit’s economic benefits are harder to measure.
Through the Center for Research on the Wisconsin Economy, I recently completed a study estimating the benefits. Analyzing manufacturing and overall employment growth since the credit was introduced, I found the policy has helped create substantial job growth in Wisconsin.
Estimating the impact of the credit is difficult because we don’t know what would have happened if the policy had not been implemented. Just looking at recent outcomes in Wisconsin does not identify the policy’s contribution. Further, comparing outcomes in Wisconsin to other states or the nation combines so many sources of variability — including other policies, labor force trends, demographics, industry concentrations and urban dynamics — that it’s difficult to isolate the effect of the credit.
So I focus on local labor markets by comparing counties on either side of the Wisconsin border. Many factors other than state policies are common to these neighboring border counties, and my empirical work includes controls to better isolate the policy impact.
This comparative perspective is important. As Wisconsin has approached full employment, job growth has slowed to the rate of workforce growth. Over the past year, manufacturing employment in the Wisconsin border counties has been roughly constant. But over the same time span, the counties just over the border have lost nearly 2,700 manufacturing jobs.
This suggests positive impacts from policies in Wisconsin, as my formal results show.
I found significantly faster employment growth in Wisconsin, largely driven by the tax credit. Since 2013, manufacturing employment has grown nearly 2 percentage points faster per year in the Wisconsin border counties, relative to counties just across the border.
Moreover, employment is sensitive to tax changes: Every percentage point cut in the manufacturing tax rate leads to a 0.9 percentage point increase in manufacturing employment growth. Further, the cuts in manufacturing taxes spill over to the broader economy, with non-manufacturing employment growing 0.7 percentage points per year faster in Wisconsin.
Applying these estimates statewide while accounting for differences between the border and interior, I estimate the credit has accounted for a total gain since its inception of more than 20,000 manufacturing jobs and more than 42,000 total jobs in Wisconsin.
While the Legislature must consider other important dimensions of tax policy — including its cost, distributional impact, and efficiency — my results suggest significant employment effects from changes in business taxes. Broad-based business tax reductions could lead to even larger employment gains.