Illinois Is Poised To Dangle Business Incentives To Big Companies — But Is It Worth It?
This story was published with Crain's Chicago Business.
Bipartisanship seems rare in Springfield, but a few years ago lawmakers from both sides of the aisle denounced agribusiness giant Archer Daniels Midland’s request for a state incentive package worth $30 million, its price to keep from relocating top executives out of Illinois.
Democrats called it corporate “blackmail,” and Republicans chided the $90 billion Decatur-based company as tone-deaf for trying to squeeze a financially ailing state. The legislature refused to take the bait and ADM didn’t carry through with its threat, opting only to shift its high-paid brass from Central Illinois to Chicago.
That was then. These days, despite ever more tenuous state finances, Gov. Bruce Rauner and many lawmakers appear poised to embrace far more expensive incentives to induce job creating behemoths like Toyota and Amazon to settle in Illinois — much as Wisconsin recently lured Taiwanese electronics maker Foxconn with a jaw-dropping incentive package worth $3 billion.
As states increasingly jostle for jobs with taxpayer funded enticements, some experts are raising concerns that wooing business with public money is fast-becoming a self-defeating exercise in labor market cannibalism.
“It’s a fool’s game,” said Greg LeRoy, executive director of Good Jobs First, a Washington-based nonprofit that researches business incentives. LeRoy said states spend too much on incentives and don’t break even. "Don’t agree to any mega deals,” he advised. “Get back to the basics and pay more attention to small businesses."
The Wisconsin deal to help Foxconn build a 3,000-to 13,000 worker plant to make flat screen displays in Racine County may be a case in point. Lawmakers in that state recently approved the incentive package despite an estimate from their own legislative fiscal bureau that it could take 25 years for taxpayers to break even on an investment that large.
Proponents of incentives say states need them to remain competitive with each other.
“Every state wants investment within their boundaries,” said Todd Maisch, president and chief executive of the Illinois Chamber of Commerce. People might not like business incentives, he said, but they are not going away.
Once, attempts to lure away existing jobs and investment was known as "smokestack chasing" and was most common in the South where industrial growth had lagged and labor was cheaper. The Rust Belt joined in as manufacturing stagnated.
Tim Bartik, senior economist at the Michigan-based W.E. Upjohn Institute for Employment Research, said in 2015 alone business tax incentives cost public bodies an estimated $45 billion. And that’s a lowball figure because it doesn’t include the cost of luring firms to special areas such as Tax Increment Financing districts.
Bartik said his research shows that incentive packages influence less than 15 percent of relocations or expansions. Put another way, many businesses that get tax breaks for expansions or relocations are good at bluffing public officials into helping pay for something the companies intended to do regardless.
The Amazon and Toyota ventures are among the fattest industrial prizes being dangled right now, which explains a feeding frenzy among states and cities to land them. The online retailing giant says it plans to open a second headquarters to employ as many as 50,000 workers, while Toyota, in partnership with Mazda, intends a production factory to create up to 4,000 jobs.
President Donald Trump has helped fuel the bidding war against states with his endorsement of incentives deals to keep manufacturing companies like climate control systems maker Carrier Corp., a unit of United Technologies Corp., from closing factories in the U.S. and moving production elsewhere. And if Trump's policies succeed in attracting more businesses to American soil, the competition for jobs will only intensify, according to Bloomberg News.
Michael Hicks, an economist at Ball State University in Indiana, said the recession appeared to usher in a new era of skepticism about the value of incentives after politicians saw jobs melt away from companies that had received earlier breaks. But Hicks said Trump’s campaign pledge to end offshoring of American jobs and re-energize manufacturing has helped fuel a new tax break fever among the states.
“It’s as if we’ve lost our capacity for reason when we think about these things,” Hicks said.
Illinois’ experience with business tax incentives has been spotty. Two decades ago, state and local officials extended a $43 million incentive package to electronics giant Motorola to build a cell phone assembly plant at Harvard in McHenry County that employed 5,000. Six years after the ribbon-cutting, the company shut it down.
About a decade later Motorola had been split up in a restructuring, but its smartphone making offspring was back seeking tax breaks from Illinois. The redubbed Motorola Mobility negotiated a $100 million package of state tax credits to keep its headquarters in Libertyville, but within a year after getting them it laid off more than 1,000 workers.
According to state data, Illinois spent more than $500 million on business incentives in fiscal 2016. One of the most expensive programs is the Economic Development for a Growing Economy, or EDGE, also controversial because many firms that received incentives failed to make good on promises made to obtain them. Among them are Maytag, Sears and Mitsubishi.
Critics of EDGE complain the state is using it to pick winners and losers rather than encourage companies across the board with lower business taxes. As a candidate, Rauner was part of that chorus, complaining lawmakers cut special deals under EDGE that allowed some companies to retain income tax revenue withheld from employee paychecks rather than forward it to the state.
Recently, Rauner signed legislation to overhaul EDGE and increase its transparency. The law also made it more difficult to secure a special EDGE deal, though the changes are still not without critics.
“I think the whole program needs to be repealed,” said Rep. David McSweeney, a Republican from Barrington Hills who complained the changes were minor and voted against the EDGE reform bill.
What’s more, lawmakers threw in a sweetener. The new EDGE law authorizes the state to pay up to 10 percent of the cost of training workers.
Rick Funderburg, an assistant professor at the University of Illinois Springfield who’s studied business incentives, said Illinois is coming off a long budget stalemate that ended with a 33 percent corporate income tax increase. In a way, he said, lawmakers are using the EDGE program to reassure businesses and counteract the negative effects of the tax hike.
“States, particularly state leaders, are interested in portraying the business climate as friendly for businesses,” he said.
It’s under this environment that the state is putting together its package for Amazon and, separately, for Toyota/Mazda. The state needs a win. And the conversation has shifted from whether incentives are the “right thing to do” to “how much” should the incentive be worth.
Last month, state Rep. Jim Durkin of Western Springs, the House Republican leader, warned that Illinois should not “give away the store” like Wisconsin did. Still, he said, “We need to make a pitch.”