As controversy continues to swirl around Gov. Scott Walker’s job-creation agency, observers on the right and the left are calling for changes in how Wisconsin subsidizes businesses. Some are even calling for abandoning such economic development efforts altogether.
Rep. Dean Knudson, R-Hudson, a member of the Legislature’s budget committee, said this month he does not believe in the “core mission” of the Wisconsin Economic Development Corp. — using state tax dollars to help create jobs.
But those working in Wisconsin’s economic development industry say the state must continue helping companies create jobs and stay competitive in the global marketplace.
“It would be a shame if we responded to the problems at WEDC by abandoning our efforts to grow our state’s economy,” said Sen. Julie Lassa, D-Stevens Point, who serves on the WEDC board. “Nearly every other state has such programs, and if we give up on ours, businesses will go elsewhere to thrive, or they won’t get started at all. The state absolutely should do economic development, but we have to do it right.”
In the wake of a critical state audit and a State Journal investigation into a questionable loan, Walker has called for sweeping changes to the public-private agency, including ending its direct loan program to businesses. Some observers believe that step goes too far, while others say even more needs to be done to improve the state’s approach to economic development and regain the public’s trust.
While opinions about which direction the agency should go vary widely, there is consensus that the use of taxpayer money to subsidize politically favored companies must end.
“It should never be political,” said Zach Brandon, president of the Greater Madison Chamber of Commerce and former deputy secretary under Democratic Gov. Jim Doyle of the state Department of Commerce, WEDC’s predecessor. “You hope for an economic development policy that spans elections.”
Doyle’s Commerce Department also came under scrutiny — from state auditors and the federal government — for questionable business incentives.
In a statement, WEDC’s chief operating officer, Reed Hall, said the agency already goes “well beyond providing incentives for companies.” Reed said the public-private agency helps with training and expertise to develop export programs, provides brownfield grants to clean up blighted sites and to improve communities’ main streets and supports “clusters” of businesses in water technology, bioscience, energy and manufacturing.
“There is no question that the state must continue to play a key role in growing the economy and creating jobs by proactively supporting companies that want to relocate or grow here,” Hall said. “As I travel around the state, I have had numerous company executives tell me that they would not have been able to expand their company or remain in Wisconsin without assistance from WEDC.”
Hall noted the award of up to $9 million in tax credits to Exact Sciences in exchange for adding 750 jobs and investing more than $26 million in capital expenditures in Madison.
“While there is a cost to the state of providing incentives, it’s important to point out that the state and the region receive a return on our investment through new income, sales and property taxes — both from the project itself, and from all of the indirect job creation and economic activity,” Hall said.
Walker respondsto controversy
The debate over WEDC was sparked by two recent blows to the agency’s credibility. First was an audit by the Legislative Audit Bureau that found WEDC failed to consistently require businesses to comply with key requirements in exchange for state taxpayer subsidies, including documenting jobs it helped create.
A State Journal investigation this month also raised questions about a $500,000 loan to a failing Milwaukee construction firm owned by a Walker campaign donor. The loan, pushed by some of the governor’s top aides, was never repaid. Two Democratic members of the WEDC board have called for a criminal investigation into the loan to Building Committee Inc.
Just hours after his office released records to the newspaper showing his former chief of staff and campaign manager helped BCI owner William Minahan secure the state loan, Walker responded by announcing sweeping changes to his signature public-private agency.
He called on the Legislature to end direct loans to businesses from WEDC and instead “put money towards tax incentives that have clear deliverables and expected outcomes” for companies to receive subsidies.
According to the audit bureau, the agency awarded $157.3 million worth of tax credits, grants, loans and bonding authority to spur job growth in 2013-14, the most recent year available. Loans made up $19.1 million of the total.
The Legislature’s budget committee already has agreed to enact other changes requested by the governor, including removing him as chairman of the WEDC board, deleting his proposal for a new $55 million revolving loan fund for economic development and calling off his plan to merge WEDC with the Wisconsin Housing and Economic Development Authority. But they rejected his suggestion to also keep lawmakers off the board.
Where to go from here?
Aaron Olver, former Commerce secretary under Doyle, said the state’s economic development policy should focus on building on Wisconsin’s strengths, which he lists as including its natural environment, UW-Madison’s research output, and its K-12 education system.
Olver, managing director of UW Research Park, agreed with several economic development experts who said Wisconsin also should focus on supporting small, start-up and high-tech businesses, which generate most new jobs.
John Torinus, a longtime business owner and member of the Wisconsin Manufacturers & Commerce board, said the state should offer banks partial loan guarantees as incentives to lend to startup and emerging companies. Torinus also recommends increasing existing tax incentives to investors who provide capital to entrepreneurs to create businesses.
He favors “taking the decision out of the hands of a political body ... and let the banks take the lead on these loans.”
The Wisconsin Economic Development Association is pushing for lawmakers to retain the WEDC loan program, said the group’s executive director, Brian Doudna.
Doudna said tax credits as proposed by Walker are fine for businesses turning a profit, but many startups aren’t there yet.
What such companies need is money to keep growing, he said. Doudna suggested that state and local economic development programs provide “gap financing” once a business has secured some private capital.
His association also prefers a public-private model such as WEDC, which Doudna said can be more responsive to businesses’ needs.
The case againststate involvement
According to an article in the May issue of State Legislatures Magazine, states offer billions of dollars in subsidies with little to show for it.
“Today, every state offers at least some sort of tax incentive for businesses,” according to the article by Jackson Brainerd, a research analyst for the National Council of State Legislatures. “Yet, despite lawmakers’ enthusiasm for corporation-specific incentives, many economists, experts and other observers, from the left to the right, doubt they are an efficient use of public money.”
Groups including the conservative Madison-based MacIver Institute question whether states should even be in the business of subsidizing business.
“We believe government does not have a role in this arena,” said Brett Healy, executive director of MacIver, which promotes a free-market approach. “Any time the government gets involved in this type of corporate welfare, picking winners and losers, all sorts of problems crop up.
“If we take a step back and be honest with ourselves, this is not a critical or core mission of state government,” Healy said.
Christian Tscheschlok, executive director for the Washington County Economic Development Corp., said that approach “would only work if everyone in the entire world would agree to that principle. It’s just not practical.
“Every community is essentially competing with the world for economic development,” he said.
While critical of state spending on economic development, the left-leaning Good Jobs First does not oppose it.
The group works with governments to craft incentives with “binding, enforceable commitments” to provide jobs that pay living wages with benefits to local residents and do so in an environmentally friendly way that meets community needs.
“It’s unlikely that the practice of handing out subsidies will be done away with any time soon,” the Washington, D.C.-based group states in its ”beginner’s guide” to economic development. “But it is possible to reform the practices of how subsidies are awarded and what standards those projects are held to.”
Torinus, chairman of the board for Serigraph Inc. in West Bend, said his business got $790,000 in tax breaks in exchange for adding 150 jobs to the printing company.
“Did that help us? Yes,” Torinus said. “It helped us move faster. Would we have done it anyway? Probably, (but) it would have taken us longer.”