Frank Manzo IV is the Policy Director of the Illinois Economic Policy Institute (ILEPI). Visit ILEPI at www.illinoisepi.org or follow ILEPI on Twitter @illinoisEPI.
Today, ILEPI released a Policy Brief on The Benefits of Doing Business in Illinois [pdf].
Too often, the public policy discourse is focused on costs. The costs of labor, the costs of transportation, the costs of taxes. Costs, costs, costs. Lost in the discourse is an emphasis on the benefits of policies.
The Benefits of Doing Business in Illinois finds that – despite sluggish economic growth, a high unemployment rate, and moderately high tax rates – Illinois remains a great place to do business. Below are 10 important facts found in the report about Illinois’ pro-business environment:
1. After adjusting for inflation, the Illinois economy has grown by 10.6 percent since 2000. This growth is less than the nation as a whole (19.6 percent), but higher than the rest of Illinois’ neighbors put together (7.6 percent). The Illinois economy has expanded by more than the greater region since 2005 as well.
2. Per capita personal income has grown by $1,510 since 2005 and is now $45,832 in Illinois. The national average is $43,735 while the average for Illinois’ neighbors is just $40,165. Income growth has been about 3.5 percent for all regions. Higher incomes translate into higher consumer demand in the Illinois market.
3. While Illinois’ unemployment rate (8.6 percent) is higher than the nation (6.7 percent), a higher percentage of the population has a job in Illinois (59.4 percent) than in America (58.8 percent). The U.S. unemployment rate is lower in part because more people have dropped out of the labor force and given up searching for work than have individuals in Illinois. What this means: if Illinois’ labor force participation rate was 1 percentage-point lower, the state’s unemployment rate would have been 7.4 percent. The U.S. labor force participation rate was 2.0 percentage-points lower.
4. The primary reason that labor is more costly in Illinois is that the workforce is better-educated. In Illinois, 42.3 percent of the population has a high school degree or less while 30.8 percent holds a bachelor’s or advanced (master’s, professional, or doctorate) degree. By contrast, the respective figures for the rest of the region are 46.5 percent with a high school degree or below and just 23.3 percent with at least a bachelor’s. For the nation: 44.9 percent and 27.4 percent. Illinois also has three of the Top 50 National Universities and eight of the Top 150.
5. Illinois has the largest intermodal (inland) port in the Western Hemisphere and third-largest in the world after Hong Kong and Singapore. The state has 139,000 public road miles, 113 public-use airports including O’Hare (the fifth-busiest airport in the world) and Midway, 41 freight railroads and 7,800 miles of railroad tracks, approximately 1,100 miles of inland waterways, access to the Mississippi River and the Great Lakes, and is less than 350 driving miles from nine major metropolitan areas with access to 22.4 million urban consumers. Nearly half of all the nation’s rail freight originates in, terminates in, or comes through Chicago.
6. Energy costs are generally lower in Illinois than in the rest of the country. Residential natural gas, industrial electricity, and commercial electricity are all 0.8 to 2.5 percent cheaper in Illinois. Crude oil petroleum is $0.65 cheaper per barrel, at first purchase. Only the coal sales price is higher in Illinois than in the nation.
7. While construction labor costs are in fact high, the state’s construction workers are extremely productive. The per-worker value added is $126,111 on average to the employer, $72,573 more than worker payroll costs. After accounting for labor costs, Illinois construction workers are between $10,000 and $17,000 more productive than their counterparts in the nation and the rest of the Midwestern region.
8. The combined state and local tax burden as a percentage of total state income is 10.2 percent, only slightly more than the rest of the region (9.8 percent) and the national average (9.9 percent). A family with $50,000 in taxable income would face a 5.0 percent income tax rate in Illinois. They would be taxed more in Minnesota (6.2 percent), Wisconsin (6.0 percent), Iowa (5.8 percent), Missouri (5.6 percent), and Kentucky (5.4 percent). Illinois’ corporate income tax rate, at 9.5 percent, is higher than the national average of 7.1 percent but lower than Minnesota (9.8 percent) and Iowa (10.0-12.0 percent). However, 70 percent of all corporations in Illinois pay no corporate income taxes. It is also worth noting that Minnesota, Wisconsin, and Iowa have some of the highest tax rates in the region but their economies have grown the fastest while the lowest-tax states of Michigan, Ohio, and Indiana have seen the smallest gains in personal incomes. Thus, high tax burdens do not necessarily deter economic development and low tax burdens do not guarantee economic success.
9. Illinois is a donor state, paying more into federal government revenues than it receives in return. Federal aid accounts for 33.7 percent of the state’s general revenues, or $1,526 per capita. In comparison, federal aid accounts for fully 35.9 percent ($1,911 per capita) of state general revenues nationwide. But Illinois’ higher incomes mean higher personal tax contributions to the federal government. In effect, Illinois workers are subsidizing the operating budgets of other states, including every nearby state except Minnesota and Wisconsin, even though the state government faces an $8.7 billion backlog in unpaid bills and obligations.
10. The State of Illinois spends billions of dollars to stimulate economic development. In 2012, expenditures on economic development (e.g., workforce training and tax credits to businesses) totaled $1.33 billion, up from $930 million in 2008, and spending on transportation to update infrastructure and stimulate employment was $4.47 billion. Tax Increment Financing (TIF) districts in Chicago alone also generate about $500 million each year in new tax revenues, which the City then re-spends on economic development. Notable business tax credits in Illinois include (but are not limited to) the Illinois Small Business Job Creation Tax Credit, the Research and Development Tax Credit, the Economic Development for a Growing Economy (EDGE) Tax Credit, and Enterprise Zones.
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Based on the above facts, ILEPI recommends the following policy actions:
- To address Illinois’ persistent unemployment problem, increase investment in updating, modernizing, and expanding Illinois’ infrastructure.
- To keep the unemployment rate down, avoid further cutting public sector jobs.
- To pay down Illinois’ bills, keep the personal income tax at 5.0 percent for an additional four years until 2019 to maintain the $4.7 billion increase in tax revenues. An extension would allow the state government to reduce its unpaid obligations to $2.8 billion by 2020 through annual repayments of between $0.8 billion and $1.2 billion.
- A 1.75 percentage point drop in corporate income taxes would encourage job growth but cause a $665.0 million dip in tax revenues.
- State officials need to do a better job of procuring federal funds. If federal aid was increased by just $150 per person (subtracting less than $7 per person from every other state), Illinois would have earned $1.9 billion more in annual revenue.
- Illinois needs to continue to reduce the crime rate, particularly by finding new revenue to increase the police force.
In the end, Illinois maintains a high-income, highly-educated, and well-connected economy. Illinois continues to remain a great place to do business.
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The Illinois Update 