Post-tax hike, Illinois weathers attempts to poach jobs

Editor's note: This is the first in a two-day series examining the impact of the increased corporate tax on Illinois and its business climate.

Coming Monday: Caterpillar Inc. CEO Doug Oberhelman hasn?t been afraid to speak his mind when it comes to Illinois? business climate, including the state?s workers? compensation costs.

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When Illinois legislators approved increasing the income tax in January 2011, a couple of neighboring governors wasted no time trying to take advantage.

Indiana Gov. Mitch Daniels and Wisconsin Gov. Scott Walker shed a few crocodile tears, bought billboard and newspaper ads urging Illinois businesses to flee and barnstormed the airways to proclaim their states would benefit from Illinois? desperate attempt to soak up the red ink smeared across its balance sheet.

Roughly 18 months later, Indiana says it has attracted 1,600 jobs from firms that moved Illinois employment to the Hoosier state or from companies with Illinois presences that have expanded in Indiana. The Wisconsin state economic development agency says it does not really track how many jobs went north, but has done deals with two companies to bring 116 jobs over the border.

Those numbers may be significant in the sense that no state wants to lose jobs to another, but they?re not quite the windfall that would match up with the rhetoric of a year and a half ago. Illinois officials say they are holding their own in a tough global marketplace because of the state?s major assets ? Chicago, which is a global city, and Illinois? vast transportation network of highways, railroads and O?Hare International Airport ? and because they have been able to show slow, but steady progress in addressing shortcomings that make businesses skittish about coming here.

David Vaught, Illinois? former budget director who now directs the state Department of Commerce and Economic Opportunity, points out that the state has gained 48,000 private-sector jobs since the tax increase passed, according to a U.S. Bureau of Labor Statistics report released in April.

?I?m sure they can find a company here or there, and we can find a company that came from those other states to ours,? Vaught said. ?I don?t think we should get too carried away with the border analysis because it?s the net change that?s most important when you?re competing in the international economy.

?I think when businesses look at business location, they look at more than that (tax rates). Chicago and Illinois are leaders in the international economy.?

Regional view

Indiana Commerce Secretary Dan Hasler, a former executive at the pharmaceutical giant Eli Lilly and an Illinois native, said Indiana never had a goal for the number of businesses it wanted to poach.

?I think it?s about what we expected,? Hasler said of the 1,563 jobs and $294.1 million in investments that firms with Illinois connections plan to make in Indiana. ?The situation for a business operating in Illinois and Indiana is so dramatically different.

?I was just with a group of site selectors this morning. I said, ?You know what, everyone wants Illinois to do better.? We are better served by a strong Midwest than just a strong Indiana.

?I can guarantee you most people in China don?t know about Indiana. But they have heard about the Midwest, the breadbasket, the heartland of America, Chicago, that?s what we need strong, and we will all benefit from that. But some of our neighboring states need to get their game on.?

Some of the rhetoric clearly has been toned down in recent months. Walker told reporters in an April appearance in Springfield that he did not believe firms would relocate entire operations from Illinois to Wisconsin.

?We don?t keep track of that,? Walker said in April. ?What it?s going to be is companies that want to grow and expand. The biggest thing we keep track of is the unemployment rate. Illinois? is 9.1 percent. Wisconsin?s is 6.9 percent, and I believe it?ll continue to drop because of our policies.?

Stealing businesses was never the point of Indiana?s ?Illinoyed? campaign, Hasler said.

?I don?t want to poach Illinois companies or Michigan companies or California companies, but doggone it, if they?re going to leave Illinois, if they?re going to leave Michigan, I sure as fiddle want to keep them in the Midwest,? Hasler said. ?What we?re doing is frankly catch them as they fly by and show them they don?t have to go to Texas. Indiana is an incredible alternative.?

Jobless rates

While Vaught touted Illinois? jobs numbers, there is some early evidence that businesses have fled. Secretary of state records how many corporations and limited-liability companies are registered in the state. There were 71,449 corporations and LLCs registered in the state?s 2010 fiscal year, which ran from July 1, 2009, through June 30, 2010. In FY2011, 73,130 businesses were registered. The number fell back to 71,434 in FY12 as of June 13, with 17 days to go in the fiscal year.

?I think these numbers go up and down,? Vaught said. ?The number that we?re really happy about in the Bureau of Labor Statistics report are the sector numbers, like manufacturing. People have thought for a long time that ... manufacturing jobs were going overseas, that that was a permanent drain. 2011 was an uptick in manufacturing in Illinois. When you add what?s happened in 2012, through April, with what?s happened in 2011, over 22,000 new manufacturing jobs have been created in Illinois. So we tend to look at it through a jobs lens.?

In May, the U.S. Bureau of Labor Statistics reported that Indiana and Wisconsin both have lower unemployment rates than Illinois -- 7.9 percent and 6.7 percent, respectively. Illinois? unemployment rate was 8.7 percent. Indiana has gained 111,000 jobs since Illinois passed its income tax increase, while Wisconsin has lost 13,000 jobs, according to the bureau.

What?s important?

Asked to make the case for Indiana, Hasler said he doesn?t have to because national publications and fiscal watchdogs already have. In January, the non-partisan Tax Foundation ranked Illinois? business tax climate 28th while Indiana?s ranked 10th. Site Selection magazine ranked Indiana?s business climate sixth in the nation while Illinois came in 21st. CEO Magazine ranked Illinois as the 48th best state to do business while Indiana came in fifth.

?You shouldn?t pay attention to me, and you shouldn?t pay attention to the governor, OK?? Hasler said, referring to Daniels. ?I?m a big believer in third-party reference as opposed to what a politician or I might say.?

There?s more to living in a place than its tax rates, Vaught countered.

?We don?t hear a lot about those ratings from companies. They?re much more specific about what they want to do and what they want to accomplish,? Vaught said. ?The overall ability of people to educate their kids, have a vibrant place to live, those are crucial to people as well.

?The one I saw most recently ? I didn?t get to open my National Geographic from December 2011, I just opened it this month ? there?s a survey in there about the most influential cities in the world, and Chicago, I believe, was ranked No. 6 only behind New York in the United States. It ranked right up there with Paris and London and Hong Kong as major influential cities in the world. You can?t talk about the Illinois economy without considering how vibrant and strong Chicago is, culturally and otherwise. That?s what we tell them.?

Moreover, Illinois has made progress in addressing some of the things that have given it a bad reputation, Vaught noted. It has made changes in its workers? compensation system, Gov. Pat Quinn signed a bill this month aimed at restructuring the state?s budget-busting Medicaid system, and talks continue on overhauling a pension system that has the state $83 billion in debt.

Vaught also pointed to two changes that he believes have flown under the media radar ? extending a tax credit for research and development for five years and restoring a tax deduction for corporate operating losses that was in effect for a year.

?Our research-and-development credit ? expired numerous times. It had created huge uncertainty,? Vaught said. ?It was a step toward making sure some of our tax incentives were applied in very effective places, not in old, obsolete ways. I think that was an important signal to the business community that we as a state are willing to make adjustments, make our tax code better through tax reform.?

Tax credits, too

Of the 14 companies cited by the Indiana Economic Development Corporation as having chosen Indiana over Illinois, 11 have or will relocate some or all of their Illinois jobs to the Hoosier state. Three of the companies have an Illinois presence, but are expanding operations in Indiana. At least two of the 14 are based in Indiana, have an Illinois presence and are expanding in Indiana.

Each received tax incentives conditioned on the companies meeting job-creation and capital-investment requirements.

?The companies receive their incentives from the state, which are in the form of refundable tax credit, after we have validated by Social Security number that they have hired and paid a Hoosier,? Hasler said. ?It keeps you out of these games of a company making a promise, they?re here for six months, the state?s out $40 million and these guys bolt, everybody?s upset and it?s a big waste of money.

?That gets with our philosophy, too. I don?t want companies to move to Indiana because they got a big incentive package. You cannot make a bad move to Indiana or a bad move to Illinois good enough by paying a boatload of incentives. They?re coming to Indiana because we can, time and time again, show them they can reduce their operating costs as a business (by) 20 to 30 percent ? payroll taxes, corporate taxes, real estate, lease, workmen?s compensation, wages, you name it, energy cost, logistics costs.?

?Big problem?

Officials from most of the companies involved did not return phone calls seeking information about why they moved jobs from Illinois or expanded in Indiana. Those that did said factors beyond the income tax increase played a role.

Franciscan Alliance, a 13-hospital health-care system with operations in Indiana and Illinois, is moving its physician-billing operations to suburban Indianapolis, creating 84 jobs and investing $8.3 million to buy and remodel a 96,500-square-foot building.

?If the question is are we moving away from Illinois in general, it would be yes,? said the alliance?s regional CEO, Gene Diamond. ?It?s the malpractice climate, to tell you the truth.?

The alliance has two hospitals in Illinois in south suburban Chicago; the rest are in Indiana. The medical malpractice insurance costs for the two Illinois hospitals cost as much as all of the Indiana facilities combined, Diamond said. Caps on medical malpractice damages were passed and found constitutional in Indiana. Illinois? attempts to cap them have been ruled unconstitutional by the state Supreme Court.

?We?ve got a big problem in Illinois,? Diamond said.

As for the billing services themselves, they are being relocated because "it?s a little bit less expensive to operate them in Indiana. We?re primarily an Indiana system,? Diamond said, also citing cheaper property and a more attractive climate in central Indiana.

Because the system is not-for-profit, the income tax increase was a factor only in that Indiana employees will not have to pay it.

Uncertainty hurts

Central Illinois was not any different from the rest of the state when it came to talk of iconic businesses leaving, whether it was a large, international manufacturing firm like Caterpillar Inc. or a small business, like Springfield?s downtown popcorn shop, Del?s. Neither has left so far, although Caterpillar ruled out Illinois for its expansion plans in the immediate future.

Shellie Jacobs posted protest signs in the window of Del?s Popcorn Shop, 213 S. Sixth St., in early 2011, about when legislators and Gov. Pat Quinn began debating the possibility of a major increase in Illinois income taxes.

But the Springfield business owner said it wasn?t so much higher taxes as it was the added uncertainty that prompted her unusual protest.

?It was just another straw on the camel?s back,? said Jacobs, who has owned the shop for 27 of its 31 years.

Rising employer costs for unemployment withholding, a state minimum wage higher than the federal standard, unpaid state bills and state debts all have made it more difficult to plan for expenses, said Jacobs.

?You can price your product wherever you want, and then you get this notice from the Illinois Department of Employment Security that they?re going to triple your unemployment compensation costs,? said Jacobs.

?I can?t make the assumption my costs are going to be the same next year as they are this year, because someone is probably going to come along and change it.?

Locally committed

Del?s and the Jimmy John?s restaurant chain both received widespread attention for their protests against higher income taxes in early 2011. Jimmy John?s owner, Jimmy John Liautaud, threatened to move the corporate headquarters in Champaign out of Illinois.

The company remains in Champaign, and Jimmy John?s spokeswoman Mary Trader said executives would have no further comment on the issue.

Jacobs, too, suggested in 2011 that any expansion of Del?s Popcorn outlets would be outside Illinois. A new company, Del?s Global Popcorn Inc., was formed to oversee the expansion. Florida was an early target market.

An already-planned shop in Taylorville, about 30 miles southeast of Springfield, opened in April 2011, and Jacobs announced recently that a shop will be added on the west side of Springfield this summer. However, the new Springfield store replaces the one in Taylorville.

Jacobs said the second Springfield location opens the way for her son, Logan Kolhrus, to get into the family business.

Jacobs said expansion remains a possibility and that she does not rule out adding stores in Illinois ? her concerns about taxes notwithstanding.

?Are we going to invest in Illinois? That card is still out there,? said Jacobs. ?There are states that are more business friendly.

?I?m scared to death,? Jacobs added. ?Are they (legislators and the governor) going to be able to fix it? I don?t know. I?m just committed to Springfield. I?m not going anywhere.?

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Illinois? income tax increase

Effective January 2011

--The individual income tax increased from 3 percent to 5 percent

--The corporate income tax increased from 4.8 percent to 7 percent. Illinois corporations also pay a 2.5 percent personal property replacement tax.

Chris Wetterich can be reached at 788-1523. Tim Landis can be reached at 788-1536.

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