To States Trying to Lure Illinois Businesses: It's Not Just the Tax Rates, Stupid


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We recently brought you news of policymakers in Illinois voting to temporarily increase their corporate and personal income tax rates. The state’s flat rate income tax will increase from 3 to 5 percent until 2015. In 2015 the income tax rate will fall to 3.75 percent, and in 2025 the rate will fall to 3.25 percent. Corporate income taxes were also increased from 4.8 percent to 7 percent until 2015, when the rate will drop to 5.25 percent. In 2025, the corporate income tax rate will fall back to 4.8 percent.
 
For tax justice advocates and other folks worried about the state’s fiscal solvency (lawmakers passed the tax package in order to help deal with a $15 billion deficit) the tax increase was welcome news. In a bit of a twist, some public officials and lobbying groups from other states seem elated by the legislation too and hope that businesses will leave Illinois for their state.
 
In fact, Wisconsin Governor Scott Walker issued a statement saying, “Wisconsin is open for business.  In these challenging economic times while Illinois is raising taxes, we are lowering them.  On my first day in office I called a special session of the legislature, not in order to raise taxes, but to open Wisconsin for business.”

New Jersey Governor Chris Christie’s administration launched a campaign to lure Illinois businesses to the Garden State. An ad recently placed in the (Springfield) State Journal Register reads "Had enough of outrageous tax increases? We're committed to fiscal responsibility and lower taxes." And, according to the St. Louis Post Dispatch, the Missouri Chamber of Commerce and Industry's website says: "(We're) looking at ways to position Missouri to take advantage of our neighboring state's economic misfortune." There is even a movement afoot in Indiana to lower their state corporate income tax to lure Illinois businesses.

Illinois Governor Quinn’s response to Christie’s campaign was pretty direct. He recently said, “I don’t know why anybody would listen to him [Governor Christie]. New Jersey’s way of balancing the budget is not to pay their pension payment, not to deliver on property tax relief that was promised, to fire teachers, to take an infrastructure project — building a tunnel that had already been started — and end it and have to pay money back to the federal government.”
 
Despite these efforts to lure Illinois businesses we haven’t seen businesses packing up their computers and moving to other states. The reason is simple: There is much more to business location decisions than a state’s tax rate.

The overall business climate, education of the work force, quality infrastructure, and a variety of other factors determine a corporation’s location. Let’s not forget that revenue generated from the tax increase won’t just be flushed down the toilet — the money raised will help to fund the social and physical infrastructure that businesses need to thrive, including police, fire protection, and education.

As Paul O’Neill, former Bush Treasury Secretary and Alcoa executive, put it: “I never made an investment decision based on the tax code...” As the president of the Illinois Chamber of Commerce said, “I do not think there's going to be some immediate exodus to Missouri. Businesses don't operate that way.” States can bicker back and forth about whose state has the best business climate, but focusing only on corporate and personal income tax rates is silly and shortsighted.

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