Illinois tax increases risk business exodus

CHICAGO Fri Apr 1, 2011 11:38am EDT

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CHICAGO (Reuters) - Illinois' dire finances led steel parts manufacturer Pat Thompson to consider uprooting his factory after nearly a century in the state and taking its 250 jobs elsewhere.

His company, Modern Forge Companies, is being courted by neighboring Indiana, part of what experts say is a stepped-up competition among states to poach businesses and lure away the jobs and tax revenues they bring.

"As a person who resides in Illinois, I don't think the state is taking care of business in general," said Thompson, one among many business leaders to worry about the state's budget woes and the tax increases it enacted to address them.

Ronald Pollina's Chicago-based commercial real estate firm is receiving a flood of calls asking advice on relocating from Illinois.

"These companies are calling me on a daily basis to say they want to expand jobs, but they're going to do it in another state -- or in Brazil or China," Pollina said.

Caterpillar (CAT.N) Chief Executive Doug Oberhelman shocked the Illinois establishment when he urged Governor Pat Quinn in a letter to shore up the state's deteriorating business environment, which was discouraging investment.

In a speech to business leaders this week in Washington, Oberhelman sought to quiet talk he was threatening to move the Peoria-based heavy equipment manufacturer, which is the state's biggest private employer, with 23,000 workers.

But Caterpillar is listening to suitors such as Texas, Virginia, South Dakota and Nebraska, and the company is building plants in Texas and North Carolina.

Relocation rumors have also swirled around other big Illinois employers such as Motorola, which split into Motorola Mobility (MMI.N) and Motorola Solutions (MSI.N) just prior to the tax increase. Spokeswomen for the companies said the bulk of operations will remain in the state.

There is no hard data on businesses fleeing Illinois, but moving takes time and the depressed commercial real estate market makes unloading space difficult.

PRISONER DILEMMAS

"There is an aggressive and long, storied history of states recruiting from each other, going back 100 years or so when the textile mills poured out of New England," said Chris Whatley, Washington director of the Council of State Governments.

An historic collapse in revenues created budget crises in many states that are accelerating attempts to lure businesses, he said. Currently, states face a total of $112 billion of gaps in their budgets, which generally must be balanced each year.

States are rethinking the practice of luring corporations with tax incentives that expire within a few years, which creates an opening for another state to swoop in, Whatley said. Instead, states promote their spending on infrastructure upgrades, job training and other efforts that benefit everyone and will remain even if the company leaves.

"You're always going to have these kind of prisoner dilemmas" where a company can play states against each other "to get deep concessions," he said.

For seven years, Pollina's company has ranked U.S. states based on more than 30 factors seen as important to business, ranging from labor costs to environmental regulation.

Last year Illinois ranked 27th, and he said it is likely to drop five slots after raising its corporate tax rate to 7 percent from 4.8 percent. The rate is supposed to retreat to 5.25 percent after four years.

"We are still not a high-tax state -- we've moved up from the middle probably to the upper third. If taxes were the only issue, businesses would all relocate to Mississippi," said University of Illinois economist Geoffrey Hewings.

Pollina scoffs at attempts to woo Illinois businesses by Pennsylvania, Wisconsin and New Jersey, given their own issues -- Wisconsin ranked in the bottom 10 states, near California, which has ranked dead last in each of his surveys.

(Additional reporting by Lisa Lambert; Editing by Dan Grebler)

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