State policies matter in sizing ‘toolbox’ for high-growth economy
In Wisconsin as in every state, the public economic development toolbox includes an assortment of hammers, screwdrivers, pliers, and wrenches.
Knowing what tool to use can be the tricky part, especially when it comes to building the right “home” for startups and emerging companies.
The ongoing debate over choosing the right tools for the job was on display last week when the Legislature’s Joint Finance Committee voted 11–4 to approve a request by the Wisconsin Economic Development Corp. to reallocate $8 million from the state’s Early Stage Tax Credit program to its Business Development Tax Credit sleeve. Republican members of the budget committee voted for it; Democrats voted against it.
To most outsiders, such a move would seem ministerial and nuanced. After all, both are state tax credit programs and both are aimed at enhancing economic growth, so what’s the partisan fuss?
The answer lies in the larger national economic discussion about what works — and what doesn’t — when it comes to building a robust state economy.
Wisconsin’s Early Stage Tax Credit program has been a model for other states since it took effect in 2005. It provides 25% of state tax credits to private investors who invest in “Qualified New Business Ventures,” which are young companies with innovative technology and the kind of growth potential that often attracts angel and venture financing.
For angel and venture capitalists who invest in such companies, which apply for QNBV status through WEDC, every $4 invested produces a tax credit of $1. It’s an incentive that has helped Wisconsin grow from about $61 million in total angel and venture investments in 2004 to about $210 million in 2015, with that latter amount spread over 128 companies.
Wisconsin spent $7.6 million on Early Stage tax credits in 2010 and the total grew to $18.3 million in 2015, a sharp rate of growth that indicates more companies are qualifying for the credits — and more state investors are claiming them.
Even with the growth in use of the Early Stage credits, the annual pool of $30 million hasn’t been depleted. That’s why WEDC requested moving $8 million to the relatively new Business Development Tax Credit, which was created this year by combining two previous programs. Similar shifts of Early Stage tax credits have taken place four times in the past, twice under the former Department of Commerce and twice under WEDC.
The good news: The Business Development Tax Credit program is working, too. Because it operates on a calendar year basis versus the normal state fiscal year (which ends June 30), WEDC officials estimated they could run out of credits by July, leaving the rest of the year uncovered.
In its first five months of 2016, WEDC Secretary Mark Hogan noted in a memo to legislators, Business Development Tax Credits were used 26 times to create or retain about 3,500 jobs. Examples of projects include Belmark Inc. in DePere, The Little Potato Company in DeForest, Solomon Transformers in Prairie du Chien, and Comply 365 in Beloit. Comply 365 is an information technology company that moved from Illinois and has grown sharply ever since, as its cofounder described at this month’s Wisconsin Entrepreneurs’ Conference.
Opponents of the credit shift described it as a slap in the face to Wisconsin’s early stage business climate. They argue persuasively that almost all net new jobs in the United States are created by young companies (five years old or younger), and therefore taking tax credits from a proven program doesn’t make sense.
Proponents said they would prefer that all Early Stage Tax Credits are used every year, but state law allows such transfers when it’s necessary to balance the mix. Wisconsin ranked poorly in a recent study by the Ewing Marion Kauffman Foundation that measured how quickly companies grow once they’re started, and the Business Development Tax Credit is aimed at helping such firms grow.
The larger question is not how much Wisconsin spends on tax credits alone but whether it has invested enough across the spectrum to help startups and scale-ups.
Lawmakers voted last year to phase out a loan program targeted at young companies, even though 45 other states do precisely that. The overall budget for WEDC has been squeezed, in part because of legislative reaction to high-profile mistakes when the agency was created. That means less money is available for grants and other investments in the emerging economy.
Not every problem is a nail, and not every tool is a hammer. Wisconsin lags in both startups and growth companies, so the state’s toolbox deserves a collection that ranges from microloans to grants to sufficient tax credits to accommodate growth. That’s a good do-it-yourself project for the next state budget.
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