Indiana officials hope to capitalize on Illinois’ tax woes

Indiana Gov. Mitch Daniels had difficulty containing his enthusiasm in the week since legislators in neighboring Illinois socked corporations with a huge tax increase.

Faced with a daunting $13 billion budget deficit, Illinois lawmakers opted to raise personal and corporate income taxes—a move Daniels and state economic development officials welcome with open arms.

They seek to capitalize on the opportunity to tout Indiana as a less-expensive and more business-friendly option for companies that may find the higher cost of conducting business in Illinois too much to bear.

But will the tax increases be enough to sway some companies in the Land of Lincoln to relocate to, or expand in, the Hoosier state?

John Ketzenberger, president of the Indiana Fiscal Policy Institute, thinks the advantage is marginal.

“Indiana does stand to gain if it reduces its corporate income tax,” he said. “But that takes some time, and it’s hard to do that right now, with the Legislature counting every penny with the recession.”

To ensure Indiana maintains a competitive edge on the job-creation front, Sen. Brandt Hershman, R-Lafayette, wants to lower the state’s corporate income tax to 5 percent.

Hershman, who chairs the Senate Tax Committee, said Indiana already has a relatively low cost of doing business, but that the corporate income tax is seen as a hindrance to job creation because it is one of the highest in the Midwest.

Indiana’s corporate income tax rate of 8.5 percent is just a percentage point lower than Illinois’ new rate of 9.5 percent. And Illinois legislators insist the tax hike will be temporary and expire after four years.

Still, Daniels wasted no time chiding the tax hike, likening Illinois to a popular animated television family.

“You guys are nothing if not entertaining over there,” he said on the "Don and Roma" show on WLS-AM in Chicago. “It’s like living next door to the Simpsons—the dysfunctional family down the block.”

Illinois lawmakers on Jan. 12 voted to raise the corporate income tax rate by 30 percent and the personal income tax rate by a whopping 66 percent, pushing it to 5 percent.

The tax increase has vaulted Illinois into the ranks of states with the highest corporate rates, according to the Washington, D.C.-based Tax Foundation. It now has the third-highest rate, up from the 21st-highest previously.

While Illinois' corporate tax rate exceeds Indiana's, Indiana has a higher rate than neighbors such as Ohio, Kentucky, Michigan and Wisconsin.

And Hoosiers often pay more in income taxes than Illinois residents even when taking into account Illinois’ new rate of 5 percent.

Indiana’s personal income tax rate is 3.4 percent. But add a county option income tax, which isn’t assessed in Illinois, and the combined rate in Indiana often tops 5 percent.

COIT rates fluctuate among counties, but the average rate is about 1.4 percent. It’s even higher in Marion County, at 1.75 percent.

Even so, Secretary of Commerce Mitch Roob says that the overall cost of  conducting business in Indiana is less, when accounting for more than just taxes.

“We’ve had a flood of e-mails [from business owners] who have asked us to come visit with them,” he said. “One guy sent a note that said the new slogan in Illinois is ‘Come for the corruption, stay for the taxes.’”

Nationally, Indiana ranks 10th-best in terms of its tax climate, while Illinois slipped from 23rd to 35th, according to the Tax Foundation.

William Rieber, a professor of economics at Butler University’s College of Business, expects any benefits for Indiana will be reaped gradually rather than immediately. That’s because plans involving locations and investments are made well in advance of when they’re executed, he said.

But high taxes can be detrimental to a state, and even more so based on its location, Rieber said.

“California can get away with it with the weather, and New York [because it's a] financial center,” he said. “But, in the Midwest, we don’t have as much going for us, and we have to be more careful.”