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Dec. 12 (Bloomberg) -- Lawmakers in Illinois, where major employers are threatening to leave the state if their tax burden isn’t reduced, return to Springfield today to consider what they can’t afford to do.
They can bow to pressure from businesses, cut their tax load and deepen the state’s $8 billion budget hole by an additional $325 million. Or they can run the risk that CME Group Inc., operator of the Chicago Mercantile Exchange and the Chicago Board of Trade, and Sears Holdings Corp., parent of Sears and Kmart, will flee the state.
Giving in is “a lousy policy, and it opens the door to the next business and the next business and the next business,” said Kent Redfield, a University of Illinois at Springfield political scientist, said in a telephone interview. “It makes good political sense but it’s not sound financial policy.”
Eleven months after passing record income-tax increases that halved a $13 billion budget deficit, the Democrat-dominated Legislature is dealing with the blowback.
Lawmakers -- with no Republican votes -- approved $7 billion in personal and corporate income-tax increases in January. That provoked objections from businesses such as Caterpillar Inc. and Deere & Co., and poaching expeditions from governors seeking to lure unhappy Illinois employers. Sears and the Chicago exchanges said during the third quarter that they might leave without relief.
CME officials met with Indianapolis Mayor Greg Ballard in Chicago on Dec. 2 to discuss a move, adding to the pressure on lawmakers. Illinois Governor Pat Quinn said Ohio offered $400 million in incentives to lure the company to Columbus, according to a report in the Cleveland Plain Dealer.
“It’s a very difficult situation and we’ve created this ourselves,” Tom Johnson, president of the nonprofit Taxpayers’ Federation of Illinois, said in an interview.
The House is to convene in Springfield today to vote on two bills. One would roll back the levy on financial exchanges, including CME and CBOE Holdings, parent of the Chicago Board Options Exchange, provide tax credits for Sears, extend a research and development break and reinstate a net-operating- loss deduction. The other would provide relief to low- and moderate-income taxpayers. The package also includes $2 million in annual credits for theater companies in Chicago and a $3.5 million break for a downstate Illinois company, Champion Laboratories Inc.
The enticements are designed to halt interstate wooing of two iconic Chicago-area employers.
“In January, the Illinois General Assembly overreached and sent a message of anti-business signals,” Doug Whitley, president and chief executive officer of the Illinois Chamber of Commerce, said in a telephone interview in Chicago. “This is a positive message that says, ‘We hear you.’”
Critics argue the state is in no condition to drain revenue from its treasury. Its unfunded pension liability is $85 billion, and the retirement system has assets to pay only 45 percent of promised benefits, according to data compiled by Bloomberg. It is the lowest so-called funded ratio of any U.S. state.
Illinois Comptroller Judy Baar Topinka, a Republican, said Nov. 30 that spending reductions should be part of the package. “‘‘The ‘spend now, pay later’ culture of state government must change -- and the time is now,’’ Topinka said in a statement.
Cake and Meat
A report issued Nov. 28 by the Center for Tax and Budget Accountability, a nonprofit think tank in Chicago, said it is the wrong time to provide tax breaks, given the deficit and the ‘‘profitability of the businesses’’ that would receive relief.
CME this year has underperformed the Standard & Poor’s 500 index by about 22 percentage points and the Bloomberg State Index of Illinois by about 20.
Chicago Mayor Rahm Emanuel in a Dec. 8 statement urged lawmakers to approve the bills and ‘‘keep the headquarters of two of Illinois’ most important companies here in Chicago.” Earlier in the day, Emanuel said Sara Lee Corp. would move its North American meat operation from suburban Downers Grove to Chicago.
Illinois’s financial challenges bring political risks for Democrats, who also control the governor’s office, Redfield said. After passing January’s tax increases with no Republican votes, they don’t want to be dogged by the question of “who lost Sears; who lost CME,” he said.
“They know the state is vulnerable and that Democrats are vulnerable,” Redfield said. “It’s difficult for the Legislature and the governor to say no, and businesses know they can leverage the situation.”
--Editors: Stephen Merelman, Mark Schoifet
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