Neighboring states gleeful over Illinois tax increase

While many states consider boosting their economies with tax cuts, Illinois officials are betting on the opposite tactic: dramatically raising taxes to resolve a budget crisis that threatened to cripple state government.

Neighboring states gleefully plotted Wednesday to take advantage of what they consider a major economic blunder and lure business away from Illinois.

"It's like living next door to 'The Simpsons' — you know, the dysfunctional family down the block," Indiana Gov. Mitch Daniels said in an interview on Chicago's WLS-AM.

But economic experts scoffed at images of highways packed with moving vans as businesses leave Illinois. Income taxes are just one piece of the puzzle when businesses decide where to locate or expand, they said, and states should be cooperating instead trying to poach jobs from one another.

"The idea of competing on state tax rates is . . . hopelessly out of date," said Ed Morrison, economic policy advisor at the Purdue Center for Regional Development. "It demonstrates that political leadership is really out of step with what the global competitive realities are."

By going where no other state dares to tread, Illinois could prove itself to be a policy pacesetter or the opposite — a place so dysfunctional that officials created a jaw-dropping budget crisis and then tried to fix it by knee-capping the economy.

Illinois faced a budget deficit of $15 billion in the coming year, equivalent to more than half the state's general fund. Officials warned that state government might not be able to pay its employees. It certainly would fall further behind in paying the businesses, charities and schools that provide services on the state's behalf.

To avoid that, the Democrat-controlled General Assembly voted to temporarily raise personal income taxes 66 percent, from 3 percent to 5 percent. Corporate rates will rise, too — from 4.8 percent to 7 percent — when Democratic Gov. Pat Quinn signs the measure.

The increase is expected to produce $6.8 billion a year for the four years it's in full effect. That should be enough to balance Illinois' annual budget and begin chipping away at a backlog of roughly $8 billion in old bills.

The tax move inspired a day of taunts across state borders and finger-pointing between parties.

"Years ago, Wisconsin had a tourism advertising campaign targeted to Illinois with the motto, 'Escape to Wisconsin,'" Wisconsin Gov. Scott Walker said in a statement. "Today we renew that call to Illinois businesses, 'Escape to Wisconsin.' You are welcome here."

Illinois state Sen. Dan Duffy, a Republican, labeled the tax increase "the nuclear bomb of jobs bills."

There was even some carping from Illinois Democrats. Chicago Mayor Richard Daley predicted jobs will start trickling out of Illinois with little fanfare.

"Businesses don't have press conferences like this and announce they're moving 50 people out, 60 people out, 70 people," Daley said at an event in Chicago.

But Illinois' governor rejected the idea that the increase would allow other states to lure jobs away. "Lots of luck to them, but that's not going to happen," Quinn said at a news conference Wednesday.

Businesses look at more than taxes when making financial decisions, Quinn said. They also look at whether state government is stable and able to provide good roads and schools.

"It's important for their state government not to be a fiscal basket case," Quinn said.

A Wisconsin company seemed to prove his point.

Train-maker Talgo Inc. is threatening to leave Milwaukee because Wisconsin rejected federal funds for high-speed rail. Talgo still considers Illinois a strong possibility for its new home, despite the tax increase, said spokeswoman Nora Friend.

The tax increase "would not weigh in as a positive, but it's difficult to say whether it's the deciding factor," Friend said. "It would be one more factor that gets weighed in."

Illinois Democrats note that even after the increase takes effect, the 5 percent personal income tax rate will still be lower than many nearby states'.

The top personal rate in Wisconsin is 7.75 percent, for example, and Iowa's is 8.98 percent. Indiana and Michigan will have lower rates, however — 3.4 percent and 4.35 percent.

Bill Ecton, 54, owns Ecton's True Value Hardware in Robinson, Ill., just a few miles from the Indiana border. He was resigned to the fact that Illinois ultimately would raise taxes to repair the budget, but he said the taxes will take a toll.

"If I have to pay more to the state, it's money that I can't pay out in wages," Ecton said. "I'm not saying I'm laying people off, but maybe I'm going to look twice at adding another one."