Business tax credit plan could hit roadblocks
Forward Janesville has long advocated that state income tax credits offered as economic incentives be transferable between companies.
The basis for the group’s position is this:
Company A wants to move its manufacturing business from Illinois to Wisconsin.
Company B is young and emerging. It wants to start its business in Rock County.
Company C is a national operation that wants to locate a distribution center in Janesville.
The state of Wisconsin opens its economic development toolbox and offers all three companies income tax credits tied to job creation, capital investment or a variety of other benchmarks.
Income tax credits are used to offset income taxes payable to the state. If companies meet their contracted benchmarks, they receive tax credits that they can then use to reduce their state tax liability, if they have one.
The problem, the group says, is that the income tax credits are of little value to any of the prospects because they’re unlikely to generate enough income before the value of the tax credits diminishes.
And in the case of Company C, it never will generate sufficient income because—as a distributor or warehouse operation—it doesn’t sell anything, meaning it doesn’t have any income to tax.
That was one message delivered Wednesday as a contingent of Rock County representatives called on lawmakers during Rock County Day in Madison, an event sponsored by Forward Janesville and other chambers in the county.
The proposal is in Senate Bill 291 and Assembly Bill 376, which had a public hearing Wednesday. The Senate bill had a public hearing in January.
Each would give the Wisconsin Economic Development Corp. the option of letting companies transfer up to 85 percent of the income tax credits to another company.
The legislation has the support of area Assembly representatives, including Joe Knilans, R-Janesville; Amy Loudenbeck, R-Clinton; Evan Wynn, R-Whitewater; and Janis Ringhand, D-Evansville.
Sen. Tim Cullen, D-Janesville, likes the idea, but said Thursday that the legislation—as written—is too vague and has been questioned by lawmakers on both sides of the aisle.
The main problem, Cullen said, is that the bill’s language does not specifically hold the original company responsible for reaching its performance benchmarks—namely job creation or capital investment—after it has transferred the tax credits to another company.
“It’s about accountability, and this bill doesn’t say the original company will be held accountable for the things for which it originally received the credits,” Cullen said. “It does allude to the WEDC having some discretion, but that’s not the way to write legislation.
“This is our tax money we’re giving out.”
Cullen said he told Forward Janesville officials late last year that lawmakers would question the lack of such specific language in the bill.
Knilans said Thursday he’s long been aware of Cullen’s concerns. He said he introduced a substitute amendment Wednesday that prohibits the transfer of tax credits for money. It also contains the same language that’s used in other state tax credit programs to ensure that the original recipient fulfills its contract with the state, he said.
“It’s all about accountability,” he said.
Knilans said he also would include wording that requires the WEDC to review and report annually on how recipients are meeting their contracts.
“We haven’t changed the language at all from how all the other tax credit programs are written,” he said. “The liability is still is there.”
Knilans said companies involved in the transfer of tax credits would have a relationship that creates jobs and fosters investment on the local level.
For example, he said, Company A might want to lease space from the more established Company B. Company B makes improvements to its facility to accommodate Company A, and therefore assumes a degree of risk.
As a way to mitigate that risk, Company A—if it doesn’t have sufficient income to use the credits—would transfer them to Company B.
James Otterstein is Rock County’s economic development manager and the legislative co-chairman for the Wisconsin Economic Development Association, a group that has more than 400 economic development officials in the state.
In Knilan’s example, Otterstein said, it would be a mistake to assume that Company A will never make enough money to warrant the use of the credits. It’s just that they probably won’t do so quickly enough.
Income tax credits typically must be used within three to five years.
Otterstein testified Wednesday before the Assembly Committee on Jobs, Economy and Small Business. He said the contract between the WEDC and the original tax credit recipient will carry terms, conditions and performance standards attributed to each transfer.
“If credits are awarded, the original recipient is legally obligated to earn and utilize those credits—regardless if they keep or assign those credits to another eligible Wisconsin taxpayer—in accordance with their contract.”
A Legislative Reference Bureau analysis of Knilans’ amendment says it “does not otherwise relieve any person of the person’s responsibilities in connection with a tax credit certification.”
Cullen wants to see more specific language in the bill that holds companies responsible for meeting their contracted benchmarks.
“I think the idea is a good one, but I’d just like to see the language cleaned up,” Cullen said. “I really hope that happens and the bill passes.”
Tax credit portability
Assembly Bill 376 and its counterpart, Senate Bill 291, would create a five-year pilot program in which up to $10 million in Wisconsin income tax credits provided by the Wisconsin Economic Development Corp. could be transferred.
The pilot program would be available to qualifying counties, typically those with high unemployment rates. Under the current scenario, Rock County would qualify.
Under current law, tax credits may be earned and used to offset Wisconsin income tax due only by the original company that received them.
The WEDC typically ties the tax credits to specific benchmarks, such as creating a certain number of jobs or investing a set amount in equipment or improvements.
The proposed legislation would allow a company to transfer—not sell—up to 85 percent of the tax credits it receives to another company.
Proponents say the rationale for the legislation is that companies that either move to Wisconsin or start here often go through a scaling-up period where they don’t generate enough income to make the credits worthwhile as an economic incentive.
The tool, they say, would be more valuable if the credits could be transferred to another company that, for example, helps attract the new business with building or capital investments.