Wisconsin’s Machinery & Equipment Tax Exemptions: A Framework for Analysis Prepared for the Wisconsin Department of Revenue

Agenda M&E Exemptions M&E Exemptions Project Components Project Components New Estimates New Estimates Framework Framework Recommendations Recommendations

Background: M&E Exemptions Policies Policies –Property tax exemption –Sales tax exemption Goals Goals –Interstate competitiveness –Incentive for manufacturing growth & retention

Project Components Derive Value of M&E Exemptions Derive Value of M&E Exemptions –Statutorily required –10% imputation Conduct Policy and Practice Review Conduct Policy and Practice Review –Literature –Survey of state practices Develop Framework for Analysis Develop Framework for Analysis –Apply to M&E exemptions

Deriving New Estimates Method Method –Stratified random sampling  475 manufacturing firms (4.5%)  Weighted by total personal property value (46.2%)  5 geographic regions, broad range of industries Results Results –Composition of M&E in Wisconsin  93% exempt  7% taxable

M&E Estimates: Comparison Property Tax and Sales Tax Revenue Impact ($ millions) EstimatesProperty 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 Analysis Economic Development Economic Development –Job creation, firm attraction, retention & reinvestment  Model impact: output, employment, value-added  IMPLAN, elasticity, multipliers Equity Equity –Ability to pay (tax incidence) –Public services received Efficiency Efficiency –Impact on purchasing and location decisions Administrative Costs Administrative Costs

Economic Development: Impact Impact of a Simulated $50 Million Tax Decrease to Manufacturers on Wisconsin’s Economic Activity ($ millions) ElasticityOutput Wisconsin Output Employment Wisconsin Employment Value- Added Wisconsin (-0.2) $ %4, % $ % (-0.3)$ %6, %$ %

Economic Development: Jobs *Based on a Simulated $50 Million Exemption IMPLAN estimates IMPLAN estimates –Minimum annual cost per job: $6,200 to $10,600 –Net present value: $55,700 to $95,200 –Best-case scenario Model assumptions Model assumptions –Omits indirect effects –One year impact only –Excludes other firm decision-making factors (e.g. public services)

Recommendations Set clear goals and metrics when enacting tax incentive policies. Set clear goals and metrics when enacting tax incentive policies. Consider short and long-term evaluations from the beginning. Consider short and long-term evaluations from the beginning. Target tax exemptions/incentives carefully to achieve the highest return. Target tax exemptions/incentives carefully to achieve the highest return. Evaluate policies holistically using all four framework categories. If tradeoffs are made, take care to justify them. Evaluate policies holistically using all four framework categories. If tradeoffs are made, take care to justify them. Consider the unique economic features of Wisconsin in order to get the highest return. Do not create policies solely on the basis of other states’ actions. Consider the unique economic features of Wisconsin in order to get the highest return. Do not create policies solely on the basis of other states’ actions.

Questions?