August 22, 2017

Instead of Giving One Firm a $3 Billion Corporate Subsidy, Wisconsin Could Have Cut its Corporate Income Tax Rate by 21 Percent

Foxconn Technology Group, a Taiwanese manufacturing giant, has recently announced plans to open a liquid-crystal-display manufacturing facility in Wisconsin. In return, the state has agreed to offer Foxconn $3 billion in tax incentives over the course of 15 years. The package of tax incentives includes an exemption from certain construction sales taxes, a subsidy financed through tax increment financing, and refundable income and franchise tax credits. Foxconn will be able to collect these credits even if it has no income or franchise tax liability, because they are refundable, making them equivalent to outright subsidies.

As we have recently argued in the Chicago Tribune, the best evidence suggests that the deal will do more harm than good, with Wisconsin taxpayers footing the bill for this $3 billion subsidy. If the end goal is to make Wisconsin citizens and businesses better off, a tax cut would be far more effective than this targeted subsidy.

Wisconsin’s corporate income tax rate is the 15th highest in the nation. As shown in the figure below, we estimate that in lieu of the deal, the state could reduce its corporate income tax rate from 7.90 percent to 6.24 percent—a 21 percent drop—and keep the lower rate for the next 15 years. This cut would bring the state’s rate closer to the national average of 6.22 percent, making it a better place to do business for corporations of all shapes and size.On an annual basis, the subsidy will cost $200 million per year for 15 years. Based on figures from the National Association of State Budget Officers, we estimate that a tax cut from 7.90 percent to 6.24 percent would also cost the state roughly $200 million per year. From a fiscal standpoint, these two policies might seem identical, but their effect on the economy is very different.

Corporate income taxes—like all taxes—impose “deadweight” losses. As we wrote in our piece:

"[S]ince taxation discourages economic activity (such as a business hiring more workers), every dollar taxed out of the economy actually costs society more than a dollar. When the government taxes a transaction, some people — mainly those who were on the fence about it — will not find it worthwhile to take part as often, or at all."

Wisconsinites would be better served by a corporate income tax rate reduction that would benefit all Wisconsin corporations, their employees, and their customers.