Marketplace of Ideas Blog

The Wisconsin Technology Council’s “Looking to the Future: A Case for Bold Action” is indeed a bold blueprint of what the council believes needs to happen to improve the state’s business climate, particularly the climate for high-tech businesses.

Readers will note the plan is particularly tailored to what NorthStar Economics President David Ward notes will be the shift from “the halcyon days of 600,000-plus jobs” in manufacturing possibly into such areas as “care for the aging, education, food processing and safety, some information technology sectors, transportation and alternative fuels.” Ward has noticed the potential connection between rising standards of living in developing countries in three areas — protein, fiber and energy — and this area’s ability to produce those goods.

One general observation is that it seems more Madison–Milwaukee-oriented (the “IQ Corridor”) than oriented to the rest of the state. The organization with the most patents in Wisconsin in 2009 wasn’t in Madison or Milwaukee; it was Kimberly–Clark Corp., and because of K–C only Madison had more patents issued in 2009.

Obviously the council’s plan is not intended to leave out every county not named Dane or Milwaukee in this state. The state’s business climate is a problem statewide, as demonstrated by how Wisconsin performs in state business climate comparisons, not just in one or two geographic areas and not just in a few industries.

The plan spends a lot of space talking about taxes, of course. Our state’s tax structure has achieved the dubious accomplishment of comparing negatively to other states in business-related areas while simultaneously not generating enough revenue to fund government operations. (As for the second facet of the latter point, keep reading.)

Two particularly interesting proposals are to allow investment tax credits (which apply only to state income taxes) to be converted into refundable credits (which would be available for in-state or out-of-state investors), and changing the state’s R&D tax credit into an R&D tax refund, which would benefit early-stage companies that haven’t made a profit yet and thus don’t have tax liabilities. They should encourage venture capital investment by expanding the pool of potential investors who can take tax advantage.

This isn’t a substitute for eliminating corporate income taxes, but unfortunately there appears little interest in Madison in eliminating corporate income taxes, which would have a financial benefit for businesses as well as a marketing advantage for the state. The WTC does propose considering “ideas such as elimination of the personal property tax” in its support of “a tax restructuring plan that would enhance Wisconsin’s economic competitiveness, regionally and nationally.”

The plan also calls for restoring the state’s capital gains tax exclusion — which our governor and Legislature reduced from 60 percent to 40 percent — to “at least match the federal exclusion rate,” and to continue the 100 percent exclusion for rollover investment in Qualified New Business Ventures.

One potentially controversial suggestion is to “use the state’s bonding authority to create a fund that makes investments in other funds,” the “fund of funds” mentioned yesterday. This is not direct use of taxpayer money; it is indirect use through bonding, which obviously would add to the state debt in repaying bondholders. This also puts the state in the business of financing businesses, which is, to use a word I hate to use, potentially problematic in principle. (I do like the idea of investing pension funds into this fund-of-funds, to make government employees put some skin in the game too.) The counterargument, similar to road-building or sports stadium construction, is that state government is big enough to do something like this, and business, even a group of businesses, isn’t.

The plan has an entire section focusing on business links to education. It is good to see that, even though the president of the Wisconsin Education Association Council (a group for which the term “education reform” begins and ends with “more money”) sits on the WTC, the plan fails to fall into the Lake Wobegon attitude that our schools are great. Our state’s schools are not as great as their boosters think they are, and they certainly are not as great as the money we’re spending on them.

The plan calls for more access to higher education through financial aid, increasing STEM investment, and focusing “on the needs of business when it comes to filling critical workforce voids, and develop sustainable relationships between higher education and industry.” All of those would benefit business. All of those would benefit the rest of the state too.

“Higher education” needs to mean more than just four-year degrees, and more than just sending students into the taxpayer-funded UW universities and into the state technical college system. A four-year education is great — learning to learn is an essential skill for our several-careers-in-your-lifetime present — but some present and many future jobs don’t require four-year degrees. Backers of private colleges would tell you that private colleges use their money more wisely than the public sector because (1) they have to, since they don’t get huge sums of government money, and (2) because, to your possible surprise, the average family income of Wisconsin private-college students is lower than the average family income of UW-student families.

It would be helpful if high school graduates knew more than they currently do about personal finance. (For one thing, as a college professor told me years ago, it would mean the public-policy default option wouldn’t always be “more government.”) It would also be helpful if the world-class university’s chancellor didn’t go out of his way to alienate the entire business world and most of the Legislature, as the previous chancellor did.

The plan asks to “restore fairness and predictability to the civil legal system; ensure uniform employment regulations and establish a competitive regulatory environment.” That’s a nice of way of saying that our state is overregulated and that said overregulation has negative effects on

On energy, it supports conservation, “‘clean energy’ technologies” and an end to the state moratorium on nuclear power. We have examples of clean energy technologies throughout Northeast and North Central Wisconsin, but the idea that green energy (which is somewhat of a misnomer — any form of energy generation has environmental costs) will replace fossil fuel forms of energy generation is a triumph of hope over economic reality.

Another part of the plan won’t benefit Northeast and North Central Wisconsin, but may well hurt Northeast and North Central Wisconsin — the high-speed train to connect Madison, Milwaukee and Chicago. The benefit to this area will be nonexistent even if the line is extended to the Twin Cities, and all you need for proof is to look at a road map. (Who from this area will drive to Mauston, or Tomah, or Black River Falls to pick up a train to the Twin Cities?)

The plan’s argument:

Wisconsin ranks 48th among the 50 states in overall federal spending on a per capita basis. While Wisconsin sends $45 million in taxes to Washington each year, only 86 cents of each $1 is returned here. The rail money is an opportunity to change that dismal dynamic. …

In communities such as Brookfield, Oconomowoc and Watertown, which are proposed stops along the Milwaukee-to-Madison route, public and private leaders are hustling to persuade planners to build stations in their towns. Why? They expect a mix of commercial, retail and residential development to follow the trains like a caboose.

Of course, every station built means one additional opportunity to slow down the train. Independent of that, the legitimate argument on our taxes-sent-to-Washington vs. spending-from-Washington deficit should be a comment on the quality of the work of our federal elected officials, not an argument to spend money on something whose cost is underestimated and usage is overestimated.

Why will it harm this area? Because many of the products produced in this area are shipped to their customers on rail. And, as the Economist points out, passenger rail and freight trains are not compatible:

Despite the excitement of railway buffs and the enthusiasm of environmentalists, high-speed rail in America is likely to mean a few more diesel–electric intercity trains at 110 mph, not swish electric expresses going nearly twice as fast.

But the problem with America’s plans for high-speed rail is not their modesty. It is that even this limited ambition risks messing up the successful freight railways. Their owners worry that the plans will demand expensive train-control technology that freight traffic could do without. They fear a reduction in the capacity available to freight. Most of all they fret that the spending of federal money on upgrading their tracks will lead the Federal Railroad Administration (FRA), the industry watchdog, to impose tough conditions on them and, in effect, to reintroduce regulation of their operations. Attempts at re-regulation have been made in Congress in recent years, in response to rising freight rates. “The freight railroads feel they are under attack,” says Don Phillips, a rail expert in Virginia. …

America’s freight railways are one of the unsung transport successes of the past 30 years. They are universally recognised in the industry as the best in the world. … Since one freight train can carry as much as 280 lorries [tractor–trailers] can, railways can help to limit the rise in road congestion. Trucking companies such as J.B. Hunt have come to see the advantage of putting trailers on flat wagons for long-haul and using roads only for local pickup and delivery. …

The trouble for the freight railways is that almost all the planned new fast intercity services will run on their tracks. Combining slow freight and fast passenger trains is complicated. With some exceptions on Amtrak’s Acela and North East corridor tracks, level crossings are attuned to limits of 50 mph for freight and 80 mph for passenger trains. But Mr Obama’s plan boils down to running intercity passenger trains at 110 mph on freight tracks. Add the fact that freight trains do not stick to a regular timetable, but run variable services at short notice to meet demand, and the scope for congestion grows.

A better argument is made in espousing the expansion of broadband access and better cellphone service to rural areas. There is a reason, however, that broadband access and cellphone service quality is seen to be lacking in rural areas — the cost. (The money being spent on the train would be much better spent in electronic infrastructure.) Moreover, efforts are already being made in broadband, such as Granite Broadband in Ripon and other companies; their efforts should be augmented instead of creating the Tennessee Valley Authority of broadband.

Paying for all this is, of course, the rub. This state already has a $2.5 billion — oops, $2.7 billion — deficit, in addition to a GAAP deficit about the same size. To pay for all this without further worsening state finances in the short run would seem to require severe budget cuts, which proves the folly of how state government has been operating for the past few decades.

Wisconsin Technology Council President Tom Still notes that “While constructive, bipartisan steps have been taken in recent years, Wisconsin cannot rest on its laurels. People in other recession-battered states also understand that economic forces are rapidly reshaping the world, and that there may be no second chances for those who dawdle. If states are the laboratories of democracy, so are they citadels for economic innovation. Wisconsin has a history of providing such innovation — it is time to do so again.”

On that point, there should be no disagreement.