Ready, fire, aim: State stimulus bill offers mix of tax increases and incentives

Ready, fire, aim: State stimulus bill offers mix of tax increases and incentives

MADISON – As the federal stimulus bill steamed down the track in Washington, a separate and (much) smaller state bill leapfrogged from formal introduction to passage by the Legislature to being signed by the governor – all inside a week.
In the state Capitol, where virtually every process is designed to slow down legislation, a week is equivalent to the speed of light. But when the governor’s office and both houses of the Legislature are controlled by members of the same party, even the laws of physics can be amended.
Just as President Obama wanted rapid congressional approval of his $790-billion federal stimulus bill, Gov. Jim Doyle sought a lightning round in the Wisconsin Legislature with his $700-million tax-and-spending package. Doyle won speedy legislative approval – but the consensus deal included some tax increases the governor may not have pursued on his own.

  • Some in the business community are upset that Wisconsin will finally move to “combined reporting” as a way to collect corporate income taxes. The change will tax multi-state operations as one entity. Former Gov. Tommy Thompson proposed the same thing in the 1990s when he learned some state-chartered banks set up out-of-state subsidiaries to reduce their taxes. In today’s global economy, however, subsidiaries usually exist to serve operations and markets rather than to shelter income from taxes.
  • Others are worried that Wisconsin will impose a new tax on hospitals, a move that actually triggers higher federal Medicaid payments to those hospitals. Skeptics want to ensure the net revenue increase is passed on to consumers.
  • An increase in Wisconsin’s top income tax rate will target people who earn $300,000 or more per year. Also, the state capital gains tax exclusion will be reduced from 60 percent to 40 percent. Critics warn both changes could drive high-income people from the state or hurt small businesses organized as limited liability corporations.
  • Applying the state sales tax to digital goods and services (such as music, movies and games) was blocked in the past as being anti-competitive. Will the so-called “iPod” tax hurt Wisconsin’s growing software industry or does it reflect an inevitable state-by-state trend?

On the plus side of the ledger, Doyle proposed and won approval for expansion of Wisconsin’s four-year-old investor tax credits law. The law supports companies in start-up technology sectors by making investments less risky for angel and venture capital investors. For every $4 they put into a qualified company, investors can get a $1 tax credit. The law has helped to dramatically expand investments in start-up companies, which begin contributing to the economy well before the tax credits are claimed. Some key changes in the law:

  • The cap on tax credits for angel capital investments will climb from $1 million to $4 million. Some start-up companies have already hit the $1 million ceiling.
  • The aggregate investment, angel or venture, eligible for credits will rise from $4 million to $8 million in 2011.
  • The pool of available credits will triple, beginning in 2011, from $5.5 million to $18.25 million per year for qualified angel investments and from $6 million to $18.75 million per year for venture investments.
  • Individuals can get a limited 100 percent exclusion of up to $10 million for long-term capital gains reinvested in a qualified company. Also, more tech companies will become credit-eligible, which plays to Wisconsin’ emerging strengths in sectors outside biotechnology.
  • Other provisions will encourage investments by insurance companies in homegrown start-ups and allow a limited transfer of tax credits, which will attract out-of-state investors.

The stimulus bill also streamlines other state tax credit programs, making it easier to target state dollars. The bill expands access to capital for scientific, medical and tech-based research by allowing the Wisconsin Health and Educational Facilities Authority more discretion in issuing tax-free bonds to finance state projects.
In the separate state budget bill, Doyle is seeking a sales-and-use tax exemption for biotechnology machinery and equipment, a property tax exemption for qualified R&D investments, and an income-tax credit for increases in R&D expenditures. He’s also proposing a new Wisconsin Venture Fund and a $10 million per-year refundable tax credit program for business expansion and attraction.
Doyle and the Legislature are caught in a tough spot. Even with stimulus help from the feds, the state budget deficit cannot be eliminated through spending cuts alone. Economic growth is needed to close the gap. The stimulus bill and the state budget bill, which isn’t scheduled to pass until June, must work together to provide incentives for that growth.
Recent columns by Tom Still

Tom Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.