WisBusiness: Battle lines drawn over business taxes

By Tracy Will

For WisBusiness.com

While the Democrats’ budget repair bill and Gov. Jim Doyle’s proposed 2009-11 budget plan include some targeted business incentives, Republicans and business interests are complaining that tax hikes outweigh the potential benefits.

The Democratic Legislature on Wednesday OK’d the budget adjustment bill, which Democrats dubbed a state stimulus package. It includes combined income tax reporting for multi-state corporations. Gov. Jim Doyle was preparing to sign it soon.

And now comes debate over Doyle’s proposed $62.7 billion two-year spending plan that business interests say contains even more damaging tax increases.

“Clearly there are things in the budget bill that we have to fight,” said Jeff Schoepke, director of tax and corporate policy for Wisconsin Manufacturers and Commerce. “The playing field has been changed so we have to play in some different kinds of games. There are some major corporate income taxes in there that we have to fight. We were always ready to fight combined reporting.”

Assembly Minority Leader Jeff Fitzgerald warned that combined reporting likely will force layoffs at the Deere plant in his town.

“Raising taxes on businesses is not getting anybody back to work,” he told a WisPolitics.com luncheon on Wednesday

The battle lines between legislative Republicans and the business lobby and the Democratic-dominated Legislature and Doyle administration appeared a week after WMC announced a new policy platform that toned down the traditional “lower tax” business message. Since then, however, WMC has launched a statewide radio campaign warning against raising taxes in a recession, in reaction to the fast-moving budget repair bill.

On top of that, Doyle’s biennial budget unveiled Tuesday includes: a new high-income tax bracket, estimated to pull in an additional $311.8 million over the next two years; an alteration in Wisconsin’s exemption for capital gains taxes, estimated to pull in an additional $85 million; and a new assessment on oil companies that would bring in $272 million over the biennium to support state transportation projects.

Doyle defended tax increase proposals in his budget plan and knocked Republicans as naysayers during a media availability in Milwaukee Wednesday.

“Even in the most difficult of budget circumstances, I have kept the property tax limits in place, I have not had any sales tax increase, any income tax increase that affects anybody who makes less than $300,000,” Doyle said.

Doyle asked Republicans what they were prepared to cut.

“It’s pretty easy to just stand on the outside and say ‘I don’t like this, I don’t like that,'” Doyle said.

“I’ve already in my budget cut over a billion dollars from existing programs, made the deepest cuts in the history of the state, but I’m not going to go to a point where we’re cutting schools by hundreds of millions of dollars,” he said. “If we can ask people who in this economy are making over $300,000 to help out a little bit to make this work, then I think that’s what we have to do.”

Sen. Ted Kanavas, R-Brookfield, said the worst part of the Doyle’s budget plan was “raising capital gains taxes and corporate taxes in the same evening, The message we send is, if you are rich, don’t live here. We need to be creating wealthy people, and this is the wrong approach.

“I don’t know where to begin, there were so many bad things.” Kanavas continued. “Combined reporting is a big problem and in fact is exactly what we don’t want to do. When you put together the corporate taxes, and property taxes, senior decision-makers look at the state and Wisconsin gets scratched off the list,” from consideration as a place to locate their headquarters.

Kanavas said a recent study from the conservative Wisconsin Policy Research Institute comparing Wisconsin and Minnesota found that Minnesota’s corporate tax policy encouraged locating corporate headquarters, and the high-paying executive salaries that go with them, in the state.

But a recent study from the liberal Institute for Wisconsin’s Future found many of Wisconsin’s largest employers comply with combined reporting in many other states, and do so without having abandoned those states. The group also said states with combined reporting retain manufacturing more successfully than states that haven’t enacted this law.

Jack Norman, the group’s research director, said the bill is modeled on other state bills and is intended to “level the playing field for Wisconsin corporations” that are unable to deflect state taxes based on headquarters established in other states with more favorable tax laws.

“We found that combined reporting, which is already law in 22 other states, closes tax loopholes that allow very large multi-state corporations to shift profits from one subsidiary to another, enabling them to move profits out of Wisconsin and thereby minimize or avoid paying state income tax,” Norman said.

Under Doyle’s proposal the Legislative Fiscal Bureau estimates additional $28 million tax revenue in the current fiscal year, and $187 million from 2009-11 based on additional collections from combined reporting. Republicans attempted to amend the repair bill to pull combined reporting, but the move failed in the Assembly on Wednesday night.

Along with the tax-raising moves, though, Democrats at the Capitol are moving to beef up Act 255 tax credits for angel investments, including raising the cap on the credits from $1 million to $4 million. The proposal would allow entrepreneurs to choose any mix of eligible angel and venture capital, and provide the Department of Commerce more flexibility to respond to uneven demand in angel and venture credits. The change would be implemented retroactively for tax year 2008.

Other items would provide businesses that increase research and development by more than 125 percent of their three-year research and development average with an income and franchise tax credit worth one dollar for every one dollar of investment above 125 percent. Under the proposal, if a business spends an average of $3 million on research and development over a three-year period, and in the next year increases its expenditures to $5 million, it would receive a credit worth $1.25 million.

Tom Still, president of the Wisconsin Technology Council, said his group lobbied for expansion of the angel investing and venture capital components.

“We certainly began talking about need for incentive for angel and venture investors to get involved in early stage deals at the time when the governor and Legislature passed Act 255. That worked very well over the last four years. Its one of the reasons that VC and angel investing has increased in Wisconsin.” Still said.

“The proposal would continue the program, increase the credits available and remove some of the unintended barriers for the money to flow to the right places. So it’s a long-term improvement,” Still said.

It was one area of agreement for Kanavas as well, though he wasn’t entirely positive about it.

“The only things I could agree with are the angel investing and venture capital investing. But the stimulative effect is muted, it can’t be pushed out fast enough. It can’t be used until 2010 and 2011,” Kanavas said.

But Still said there could be impact before that.

“The credits start in the 2011 calendar year. However, knowing the credits are out the investors can structure deals to take advantage of it,” Still said. “Venture capital development might benefit from these laws because it will take time to get new Wisconsin-focused venture capital going, in time for the new credits to kick in 2011.”

Still believes the research and development tax credits are custom-fit for Wisconsin.

“The tax credits are aimed at start-up companies that are born here in Wisconsin and have technology that’s often spun out of the university laboratories. Because Wisconsin is a R&D leader it connects the universities and the entrepreneurs. We just released a report that found academic R&D is worth $1.1.billion, and 95 percent of that support is from federal and private sources,” Still said.