Wisconsin’s Machinery & EquipmentWisconsin’s Machinery & EquipmentTax Exemptions: Tax Exemptions:

A Framework for AnalysisA Framework for Analysis

Prepared for the Wisconsin Department of RevenuePrepared for the Wisconsin Department of Revenue

AgendaAgenda

M&E ExemptionsM&E Exemptions

Project ComponentsProject Components

New EstimatesNew Estimates

FrameworkFramework

RecommendationsRecommendations

Background: M&E Background: M&E ExemptionsExemptions

PoliciesPolicies– Property tax exemptionProperty tax exemption– Sales tax exemptionSales tax exemption

GoalsGoals– Interstate competitivenessInterstate competitiveness– Incentive for manufacturing growth & Incentive for manufacturing growth &

retentionretention

Project ComponentsProject Components

Derive Value of M&E ExemptionsDerive Value of M&E Exemptions– Statutorily requiredStatutorily required– 10% imputation10% imputation

Conduct Policy and Practice ReviewConduct Policy and Practice Review– LiteratureLiterature– Survey of state practicesSurvey of state practices

Develop Framework for AnalysisDevelop Framework for Analysis– Apply to M&E exemptionsApply to M&E exemptions

Deriving New Estimates Deriving New Estimates MethodMethod

– Stratified random samplingStratified random sampling 475 manufacturing firms (4.5%)475 manufacturing firms (4.5%) Weighted by total personal property value Weighted by total personal property value

(46.2%)(46.2%) 5 geographic regions, broad range of industries5 geographic regions, broad range of industries

ResultsResults– Composition of M&E in WisconsinComposition of M&E in Wisconsin

93% exempt93% exempt 7% taxable7% taxable

M&E Estimates: ComparisonM&E Estimates: Comparison

Property Tax and Sales Tax Revenue Impact($ millions)

Estimates Property Tax:Tax Shift

Sales Tax: Forgone Revenue

La Follette Project $332 $155

Summary of Tax Exemptions $239 $159

Difference $92 (39%) $4 (-3%)

Framework for AnalysisFramework for Analysis Economic Development Economic Development

– Job creation, firm attraction, retention & Job creation, firm attraction, retention & reinvestmentreinvestment Model impact: output, employment, value-addedModel impact: output, employment, value-added IMPLAN, elasticity, multipliersIMPLAN, elasticity, multipliers

Equity Equity – Ability to pay (tax incidence)Ability to pay (tax incidence)– Public services receivedPublic services received

Efficiency Efficiency – Impact on purchasing and location decisionsImpact on purchasing and location decisions

Administrative Costs Administrative Costs

Economic Development: Economic Development: ImpactImpact

Impact of a Simulated $50 Million Tax Decrease to Manufacturers on Wisconsin’s Economic Activity

($ millions)

Elasticity OutputWisconsin

OutputEmployment

Wisconsin Employment

Value-Added

Value-Added

Wisconsin

(-0.2) $461.1 0.25% 4,181 0.12% $225.3 0.19%

(-0.3) $725.0 0.40% 6,554 0.19% $350.9

 

0.30%

Economic Development: Economic Development: JobsJobs

*Based on a Simulated $50 Million Exemption*Based on a Simulated $50 Million Exemption IMPLAN estimatesIMPLAN estimates

– Minimum annual cost per job: $6,200 to Minimum annual cost per job: $6,200 to $10,600$10,600

– Net present value: $55,700 to $95,200Net present value: $55,700 to $95,200– Best-case scenarioBest-case scenario

Model assumptionsModel assumptions– Omits indirect effectsOmits indirect effects– One year impact onlyOne year impact only– Excludes other firm decision-making factors Excludes other firm decision-making factors

(e.g. public services)(e.g. public services)

RecommendationsRecommendations Set clear goals and metrics when enacting tax Set clear goals and metrics when enacting tax

incentive policies.incentive policies. Consider short and long-term evaluations from Consider short and long-term evaluations from

the beginning.the beginning. Target tax exemptions/incentives carefully to Target tax exemptions/incentives carefully to

achieve the highest return.achieve the highest return. Evaluate policies holistically using all four Evaluate policies holistically using all four

framework categories. If tradeoffs are made, framework categories. If tradeoffs are made, take care to justify them.take care to justify them.

Consider the unique economic features of Consider the unique economic features of Wisconsin in order to get the highest return. Do Wisconsin in order to get the highest return. Do not create policies solely on the basis of other not create policies solely on the basis of other states’ actions.states’ actions.

Questions?Questions?