COUNTERPOINT: Is Illinois a good place to do business?
No. The state’s business environment is a victim of self-sabotaging
By BRYCE HILL
Illinois offers many natural advantages for businesses to thrive. The Chicago metropolitan area provides access to one of the largest marketplaces in North America, with the ability to easily distribute goods both domestically and internationally. Downstate Illinois serves as one of the nation’s most important agricultural markets. With its central location – not to mention its natural resources and highly educated workforce – Illinois is an ideal hub for Midwest businesses to plant roots and grow.
So why is economic growth stagnant here? Illinois’ net-business openings, job creation, and unemployment rate all lag the national average and most regional neighbors.
Unfortunately, the Land of Lincoln can’t seem to get out of its own way. Years of poor public policy and uncertainty related to state taxes have taken its toll on our business friendliness.
Businesses considering the state take one look at Illinois’ fifth highest state and local tax burden and question their ability to invest here. Business income taxes have been in flux the past decade, rising temporarily from 4.8 percent to 7 percent in 2011, and permanently from 5.25 percent to 7 percent in 2017. Business leaders may also be concerned by the fact that Illinois’ population has been shrinking for four consecutive years and wondering how that will affect the labor market.
The state’s property tax scheme has also led to rates on private residences and businesses rising far faster than property values. Over the past 20 years, Illinois has gone from having average property tax rates to the second highest in the nation. When property taxes rise this fast, even booming businesses see their tax burden cut into their bottom line. And smaller operations feel the sting acutely.
Take P&N Building LLC in Chicago, for example. In 2013, the family business paid $32,000 for property taxes on a small strip mall. In 2017, that same strip mall cost them $44,000 in property taxes. The more than $10,000 increase is more than the family made in profit that year.
On top of rapidly increasing income and property tax rates, Illinois is one of only two states to levy a franchise tax. Franchise taxes disincentive capital accumulation and business growth by adding higher compliance costs. The convoluted process of calculating the franchise tax burden means small business owners incur accounting and legal costs to ensure that they pay the tax correctly. These costs are often higher than the cost of the tax itself, and simply serves as restriction on aspiring small-business owners.
It doesn’t have to be this way. Illinois can and should be the epicenter of the Midwest. But to make that happen, lawmakers need to make some tough decisions to address the state’s biggest problems.
First, lawmakers must commit to no new tax hikes as a signal that the state is open for business. To make that a reality, however, politicians have to get state spending under control.
That’s far from impossible. Limiting state growth to what taxpayers can afford is a great step toward righting the fiscal ship. A spending cap that would tie the growth in state spending to economic growth gained bipartisan support in Springfield last session.
But we can’t stop there. Eating up more than 25 percent of the state budget is Illinois’ massive pension crisis, which continues to worsen each year. Commonsense state reforms such as ending automatic 3 percent retiree raises and aligning retirement ages with the private sector would help rein in pension debt that already amounts to more than $150 billion. It would also maintain pensions so government workers can count on the retirement they’ve been promised, while also protecting taxpayers and businesses from being continuously tapped for more money. Ultimately, future pension adjustments will require a constitutional amendment – and these are policy reforms other states have reached, not by forcing them down pensioners’ throats, but by bringing all stakeholders to the table.
Existing and potential Illinois investors and business owners are seeking certainty in the state before making the move. Lawmakers can prove certainty in Illinois’ future by enacting crucial structural reforms rather than relying on taxpayer pockets to keep the state afloat. Because, without these changes, the Land of Lincoln will continue to be the Land of Laggards instead of a beacon of opportunity.
Bryce Hill is a research analyst with the Illinois Policy Institute, a Springfield- and Chicago-based think tank that promotes smaller government and free-market principles. Prior to joining the Institute, he was an economic research assistant at the Buckeye Institute in Columbus, Ohio. He wrote this column for the Illinois Business Journal.