It’s no secret that the state of Illinois is one of the worst run states in the nation. There have been national headlines about the state’s pension crisis, high taxes, corruption, and mismanagement.
Not making news, but a significant consequence of the awful government in Illinois, is the the steady stream of businesses fleeing the high taxes, poor infrastructure, and a decidedly anti-business environment for greener pastures.
And one of those pastures is Illinois’ neighbor, Indiana.
Illinois businesses are voting with their feet and one of the major beneficiaries is the economy of the Hoosier State. There to take advantage of this exodus is the state’s Republican governor, Mike Pence, who has been mentioned as a possible candidate for the GOP presidential nomination in 2016.
Indiana slashed corporate taxes earlier this year and is pursuing an aggressive outreach to Illinois businesses, offering generous tax breaks and other amenities.
One of the new migrants is Tec Air, a nearly half century old Illinois manufacturer enticed by Indiana’s low taxes, central location and a package of incentives that helped close the deal.
“Indiana has a balanced budget and they’re solvent,” said Tec Air president Bob McMurtry in an interview with POLITICO. “We are getting three times the spacial footprint and we’re going to be paying less than half of what we pay now in real estate taxes.”
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Since January, Indiana has passed a major tax cut that will trim corporate taxes from 7.5 percent to 6.5 percent by the end of 2015 and cut individual taxes from 3.4 to 3.23 percent by 2017.
Pence, a former member of the U.S. House of Representatives, inherited the job creation drive when he took office in January of this year. But he is now pushing deeper tax cuts and an effort to scrap business property taxes, with the hope of sparking an Indiana boom.
At the same time, Pence announced $57 million in spending cuts this month to offset lower-than-expected tax collections.
Critics say the strategy has a spotty history of success.
The left-leaning Center on Budget and Policy Priorities analyzed economic growth data from states that cut taxes in 1990s and the 2000s and found that, on average, those states grew less than the other states.
“It isn’t clear that they did worse because of the income tax reduction, but they certainly didn’t do any better,” said Michael Leachman, the group’s director of state fiscal research. “That’s consistent with the academic literature on this topic which finds in general that income tax levels don’t matter for economic growth.”
It is always tricky to isolate the impact of tax policy and the evidence in Indiana may be equally tough to judge. The economy was already starting to grow in the two years that preceded the tax cuts. In 2012, 256 companies committed to create over 27,600 jobs and the state created about 19,080 jobs in 2011.
Many Indiana communities worry that the infusion of new business won’t be spread evenly across the state. This wouldn’t be unusual, especially since relocation of the physical plant is a lot easier than relocating employees. Illinois towns and cities near the border of Indiana are most at risk of losing businesses, as many of the refugees tend to move no more than an hour’s drive from their previous location, making employee commutes to their new workplace reasonable. Eventually, the low taxes, good schools, and lower cost of living will entice most employees to move in-state.
Wisconsin and Missouri — two other Illinois border states — have also benefited from the problems in Springfield, but have not been as aggressive as Indiana in poaching businesses. But it would seem logical that as Illinois confronts its fiscal problems by continuing to raise taxes, more firms will flee the Land of Lincoln and go someplace where they are wanted and appreciated.
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