Illinois tax hike: Will businesses flee to Wisconsin?

When Illinois legislators voted to raise its corporate income-tax rate by more than 46 percent Wednesday in a party-line vote, Republicans warned that the decision would drive businesses to neighboring states with either lower tax rates or a better record of fiscal responsibility.

Apparently, Wisconsin Gov. Scott Walker (R) was listening.

On Wednesday, he unveiled Wisconsin's pitch to Illinois-based businesses: “Years ago Wisconsin had a tourism advertising campaign targeted to Illinois with the motto, ‘Escape to Wisconsin.’ Today we renew that call to Illinois businesses … You are welcome here. Our talented workforce stands ready to help you grow and prosper,” Governor Walker said in a statement.

The statement came with a fact sheet that touted the efficiencies of its fiscal record: a balanced budget without an increase in taxes, proposals to cut taxes for businesses considering relocating to the state, and reduced spending.

But Walker was not the first Illinois neighbor to pile on the misery. Last week, with the impending tax hikes already apparent, Indiana Gov. Mitch Daniels (R) told the Northwest Indiana Times: “We already had an edge on Illinois in terms of the cost of doing business, and this is going to make it significantly wider. Folks in Illinois will eventually have to decide: Is this working well enough for us or do we want something different?”

The notion that low corporate tax rates lure business is antiquated, say most analysts. Taxes pay for improved education systems, transportation, and other services that are important to businesses. Rather, what is important is a full picture of a state’s financial health – and that is how both states are trying to sell Illinois businesses on a move.

In fact, both Wisconsin and Indiana have higher corporate income-tax rates than Illinois' – even after the new increase. But Illinois has a $15 billion budget deficit that analysts suggest is leading the state into insolvency. In addition, the state owes $8 billion to vendors and has $78 billion in underfunded pension liabilities.

This is a problem, says David Merriman, a professor of public administration at the University of Illinois at Chicago and coauthor of a 2011 study examining Illinois’ budget crisis.

He says Illinois is in a precarious situation because the current tax rates are not enough to lower its deficit in a significant way, and the package approved Wednesday does not include enough safeguards to ensure that spending caps have integrity.

Merriman’s report suggests that just raising income-tax rates is not enough for Illinois to climb out of its fiscal hole. It suggests that a massive policy change is needed. For example, to balance its budget in 2012, Illinois would need to raise its corporate income tax to 11.3 percent, its sales tax from 6.25 percent to 13.5 percent, and to cut its spending by 26 percent – a combined strategy that comes with high political risk.

Illinois Senate and House lawmakers voted to raise the personal income tax rate from 3 percent to 5 percent and the corporate tax rate from 4.8 percent to 7 percent. Both rates were adjusted to carry through until 2015, when they would drop to 3.25 percent and 5.25 percent, respectively.

Wisconsin’s personal tax rate is dependent on income, ranging between 4.6 percent and 7.8 percent, and its corporate tax rate is 7.9 percent.

The personal tax rate in Indiana is a flat 3.5 percent, and the corporate tax rate is 8.5 percent.