Illinois’s fall veto session was a disappointment – little was addressed and even less was achieved. In attempts to make up for their lack of achievement, Illinois lawmakers reconvened early last week to revisit a corporate tax relief package. Specifically, this session was meant to address the recent threats to leave the state coming from some of Illinois’s largest corporations. After a two day session, lawmakers approved a $330 million tax package that will supposedly prevent CME Group Inc. and Sears Holdings from leaving Illinois.
Governor Quinn described this legislative action as a win-win situation by telling reporters that this was a
win for workers and a win for employers in Illinois… what we did here the last two days is a part of making Illinois a good place to do business and a good place to work
But was this a win for Illinois? Not really…
In the case of Sears, it is important to look at the reason the company chose Illinois as a location to do business in the first place. Illinois has been the home of the Sears headquarters for more than 125 years. Interestingly enough, in 1989 Sears had announced plans to abandon its corporate headquarters in Chicago and relocate to another state. Illinois law makers, however, were able to convince the company to stay via the provision of $178 million in state and local subsidies (déjà vu?).
This method of convincing companies to stay in or relocate to a specific state via the provision of large subsidies and tax breaks is often referred to as industrial recruitment. Despite Governor Quinn’s statement, industrial recruitment is one of the least effective ways to make a state a better place to do business.
As Robert Turner makes clear, when utilizing this approach, states generally lack the knowledge regarding how willing a business is to move or stay, how large the subsidy needs to be, and how much tax revenue the relocation will create. This necessarily means that a state cannot conduct an accurate cost-benefit analysis when creating the subsidy and thus, by definition, cannot make an efficient policy decision in this situation.
Ultimately, when states participate in this industrial recruitment method, it results in a prisoner’s dilemma type situation where states overbid for firms that end up bringing fewer jobs and less tax revenue than planned. The industrial recruitment process, therefore, generally ends up being a negative sum game.
It took $178 million to keep Sears the first time around and now Illinois is fronting a portion of the new $330 million tax package to convince the company to stick around for a while longer. Is it not yet clear that this is a fundamentally flawed method of fostering business activity?
A more efficient (not to mention, more equitable) approach would be to create a business climate which fosters all businesses rather than one that picks winners and losers. Allowing people a measure of economic freedom with low, stable, and non-discriminatory taxation and simple, non-burdensome regulation would be a true win-win.