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In the game of tax breaks, states play at their risk

Published December 19, 2011 10:29 am

Jobs • Illinois incentive package could trigger demand for more, bigger breaks.
This is an archived article that was published on sltrib.com in 2011, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

Under the threat of losing thousands of jobs to other states, Illinois officials are on the verge of approving a tax-relief package meant to keep Sears and the Chicago Mercantile Exchange from leaving. Now they face another question. Who's next?

As state senators sent the tax package to the governor's desk last week, economic development experts said other companies are likely to threaten to move as well unless Illinois offers them more financial goodies. More than 100 companies, including Deere & Co. and Abbott Laboratories, have incentive packages expiring in the next three years — and may want better deals to keep jobs in Illinois.

Businesses thinking of moving to the state could demand even bigger incentives or play Illinois against other states in a bidding war, experts said.

"Once it becomes known that you're giving incentives, other companies are going to ask for them. Why wouldn't they?" said Judith Stallmann, a professor at the University of Missouri-Columbia who has studied economic development.

The tax package includes $100 million in incentives for Sears Holdings Corp. and CME Group Inc., which runs the Chicago Mercantile Exchange and the Chicago Board of Trade. A smaller financial company, CBOE Holdings Inc., would also share in the tax relief.

To help reduce anger over the aid for those companies, the package also includes roughly $120 million in more general tax breaks for all businesses and about $110 million in relief for poor and middle-class families.

The business measures passed the Senate 44-9. The cuts aimed at families passed 48-4. Gov. Pat Quinn supports the package.

Economic development experts nationally said states often have little choice when major companies threaten to depart. Losing companies as prominent as Sears and the Chicago Mercantile Exchange, particularly without making a bid to keep them, can be a major blow to a state's business reputation.

"When you think of Illinois, you think of both of these companies," said Tim Monger, former executive director if the Indiana Department of Commerce and part of a real estate brokerage that works with companies on site selection.

Illinois officials, even ones who support the tax relief package, acknowledge that more businesses are likely to come forward with their hands out. They say the requests will have to be considered one by one, at least in the short term. Down the road, Republicans and Democrats are likely to battle over cutting income taxes — which were increased in January — or making other changes designed to improve the state's overall business climate.

An economic development and site-selection consultant in Park Ridge said he's already hearing from businesses that feel neglected and want state help.

"One of the unintended consequences of this whole thing is you are going to see a lot more midsize businesses feeling like they're getting screwed by the state," said Brent Pollina. "They're carrying the tax burden. The state doesn't care about them at all."

Some experts say generous incentive packages aren't particularly effective in creating jobs or retaining old ones.

A paper by Stallmann, from the University of Missouri, notes one study found that only 10 percent of new jobs that are attributed to economic incentives actually were created by the incentives. Another study found that companies often don't hire as many people as they promised when the state aid was handed out.

In the case of Illinois, CME Group isn't promising to keep its operations in the state even if receives the tax cut.

Sears CEO Lou D'Ambrosio said in an email to employees that when the bill is signed into law the company will "cease the review of alternative locations and remain in Illinois where we have been located for nearly 125 years."

If Sears moved its Hoffman Estates headquarters to another state, Illinois would lose about 6,000 jobs. To prevent that, the tax legislation renews a credit the company has been getting for years, guaranteeing Sears a $15 million break on its taxes for the next decade.

Losing the CME's operations could cost Illinois about 2,000 jobs. Lawmakers agreed to cut taxes for the hugely profitable company by changing how much of its business is subject to state income taxes, reflecting the fact that many of its transactions now take place electronically and don't involve buyers or sellers in Illinois. Now CME and CBOE will pay taxes on 27.54 percent of their revenue, not 100 percent, saving them about $85 million a year.

Opponents of the tax package said Illinois should help all businesses by reversing the income tax increase passed by Democrats in January.

"Once again we're picking winners and losers," said Sen. Kyle McCarter, R-Lebanon. "These special deals are bad public policy. Essentially, if you can't hire a big-time lobbyist with connections, you don't get any of your money back from the tax increase."