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What can Illinois learn from its neighbor?

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[November 01, 2014]   By Scott Reeder 

WEST LAFEYETTE, Ind. – Can Illinois, struggling with fiscal problems, learn anything from its neighbor Indiana?

Well, former Indiana governor Mitch Daniels believes the Land of Lincoln can.

Earlier this month, Daniels, who is now president of Purdue University, shared some of the reforms he instituted in Indiana for this special report.

“The governor of Arkansas used to say, ‘Thank goodness for Mississippi.’ When I took office, I used to say ‘Thank goodness for Illinois,’” joked Daniels.

In many ways Indiana and Illinois are alike.

They have identical climates.

Both are states with economies largely dependent on manufacturing and agriculture.

And both have skilled workforces, long traditions of organized labor, excellent transportation systems and central locations.

But over the last decade, the Hoosier State has consistently outperformed the Land of Lincoln.

For example:

Since the bottom of the Great Recession, Indiana has been creating jobs at nearly twice the per capita rate as Illinois.
A steady stream of Illinois businesses have relocated from Illinois to Indiana.
Indiana has the highest bond rating in the United States, Illinois has the lowest.

When a business contemplates relocating a factory or headquarters to another state they contemplate a number of factors, not the least of which is the overall health of state government, Daniels said.

“These businesses are making a long-term investment, they want to be sure they won’t be hit by higher taxes down the road,” he said. “So they look at the overall health of state government when they make their decisions.”

Todd Maisch, executive vice president of the Illinois Chamber of Commerce, noted the inconsistency in Illinois taxation policy over the last decade.

“We had Rod Blagojevich pushing for a gross receipts tax. We had Pat Quinn and the General Assembly pass a 67 percent income tax increase that is supposed to sunset soon, but now they have changed their minds and are pushing to make it permanent,” he said. “Businesses want to be able to plan and know what to expect. Illinois has been so inconsistent in its tax policy it’s difficult for them to plan and that makes them reluctant to invest in this state.”

Indiana, Wisconsin, Texas, New Jersey and other states have attempted to take advantage of this perceived vulnerability by aggressively poaching jobs from the Land of Lincoln.

Texas Gov. Rick Perry and New Jersey Gov. Chris Christy have repeatedly visited Illinois to recruit businesses to relocate to their states.

But Indiana has been by far the most aggressive purchasing billboards throughout Illinois that say things like “Illinoyed by higher taxes?” and touting the taxation benefits of moving to Indiana.

Indiana economic development officials say in recent years they have lured 40 companies and more than 3,000 potential jobs to the Hoosier State.
 


The reason more businesses are moving to Indiana from Illinois is all about taxes, said Travis H. Brown, a St. Louis-based researcher specializing interstate job migration and the author of “How Money Walks.”

Since 1985, Indiana has experienced a net gain of more than 40,000 households from Illinois. That equates to a net migration of more than $2 billion in taxable income from the Land of Lincoln to the Hoosier State, Brown said.

“Indiana doesn’t have mountains or beaches or more sunshine,” he said. “The only reason Illinoisans are moving there is for the jobs and the lower taxes. And companies are relocating to Indiana because it costs less to do business there.”

Indianans pay $3,294 per capita in taxes compared to an Illinois rate of $4,512 per capita.

On the corporate front the story is much the same.

Illinois’ corporate tax rate is 9.5 percent compared to Indiana’s 7 percent.

But Illinois’ shortcomings go well beyond tax rates say businessmen with operations in both states.

“Indiana is just a much easier place to operate than Illinois,” said Jerry Huot, a Kankakee-area businessman who, until this year, owned convenience stores in Will, Kankakee and Iroquois counties and continues to operate a petroleum distribution business in both Illinois and Indiana.

Huot said he sold the chain of 12 convenience stores this year because of higher state taxes, escalating regulatory costs and the state’s decision to raise the minimum wage.

The minimum wage in Illinois is $8.25 per hour and in Indiana it is $7.25 an hour.

And Illinois lawmakers are considering raising the minimum wage to $10.65 per hour.

Huot, who employed many students and other part-time workers in his businesses, said these wage hikes cut into profit margins and resulted in his overall workforce being smaller because he couldn’t afford to employ as many people.

The state also increased fees to inspect his gasoline pumps as a means of pumping more money into state coffers.

These increased costs coupled with new Obamacare mandates that also increased costs prompted Huot to sell his chain of stores.

“My family has been operating the Baron-Huot Oil Co. for 103 years. We have survived two world wars, the Great Depression and wars in Vietnam and Korea,” Huot said. “But the state of Illinois and Obamacare were able to do what all of those other things weren’t – put us out of business.”

 



Right to work?

For many corporate CEOs, whether a state has a right-to-work law is the ultimate test on whether to invest in a particular state.

At least that is the contention of former Indiana Gov. Mitch Daniels, who got a law passed in 2012 that prohibits workers from being forced to join a labor union or pay a labor organization a representation fee.

“A lot of companies that don’t really want to talk about it publicly are perfectly explicit about talking about in private,” Daniels said.

Shortly after Indiana passed its right-to-work legislation, Michigan followed suit.

Daniels said the measure in neighboring Michigan passed because lawmakers feared losing jobs and companies to Indiana.

Illinois, also an Indiana neighbor, is not a right-to-work state.

Just how much this is a factor in the migration of jobs to the Hoosier State is a matter of debate.

“Indiana has not derived the full benefit of becoming a right-to-work state,” said Maurice McTigue, vice president of the Mercatus Institute at George Mason University. “Those laws generally have a lag time of three to four years before you get to the full benefit.”

McTigue said such laws are desirable for creating a more attractive business climate and creating more jobs.

Other economists say there are more beneficial factors for a state becoming competitive than a right-to-work law. But they concede becoming a right-to-work state is a competitive advantage.

“I’m sure there are some who will tell you that Indiana is growing because it is right-to-work and it has tax policies more conducive to business growth. Those things are helpful. But there are other things you need to complement those decisions. You have to pay attention to the quality of schools and good infrastructure.” said Frank Conti, the economist in charge of the State Competitiveness Project at the Beacon Hill Institute at Suffolk University in Boston.

Todd Vandermyde was a lobbyist who represented Operating Engineers Local 150 in Iowa, Illinois and Indiana until last year.



He was a leader in the fight against Indiana’s Right-to-Work law and played a role in shaping Illinois labor policy as well. Local 150 has a case pending before the Indiana Supreme Court challenging the law’s constitutionality.

“I don’t think right-to-work laws are particularly important to businesses located here in Illinois,” Vandermyde said. “And it’s not right that we are legally obligated to represent people who aren’t paying us dues or representation fees.”

As to whether right-to-work law gives Indiana a competitive advantage in attracting jobs from Illinois, Vandermyde said he doesn’t know.

But Mitch Daniels says he does know. In 2012, he pushed a measure through the Legislature to make Indiana a right-to-work state.

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“In the last of our eight years we did seek legislature’s agreement to make that move. … [Indiana] was the first industrial state or northern state to do that since [1947], essentially. … Almost the only time we would ever lose a competition for new jobs it was to a right to work status. And the only states rated more highly than Indiana on anybody’s list of top places to do business were all right to work states.”

Tax structures

At time when Illinois taxes have been escalating, Indiana’s have been dropping and people and businesses have been moving from the Land of Lincoln to the Hoosier State.

This is hardly a coincidence says Travis Brown, a St. Louis researcher who specializes in studying migration data. Ranking Chart

“People follow jobs and jobs are created at a higher rate in states with lower taxes. Why else would Illinoisans be moving to Indiana? They certainly aren’t attracted by mountains, beaches or sunshine. It’s all about taxes.”

In fact, since 1985, Indiana has had a net migration of 40,000 households and more than $2 billion in taxable income from Illinois, Brown said.

Just consider:

The personal income tax rate in Indiana is 3.4 percent and in Illinois it is 5 percent.
Indiana’s corporate rate is 7 percent compared to Illinois’ 9.5 percent.
Indiana is phasing out its inheritance tax, while Illinois continues to tax estates at a top rate of 16 percent.

Tax reform did not come immediately to Indiana.

Indiana faced similar economic challenges to what Illinois faces today when Mitch Daniels entered office, the former Indiana governor told Illinois News Network.
 


“The state had run seven straight unbalanced budgets — and I mean by big margins,” he said. “It had run through its reserves and it was in a literal debt or bankrupt position. So we said to ourselves Job 1 is to balance the budget, Job 2 is to pay the debts, Job 3 is to put some money in the reserves to protect the state and to protect taxpayers and then we’ll cut taxes. And that’s exactly what we did.”

Daniels said the tax on which he first set his sights on reducing was the property tax.

“We now have one of the lowest rates of property taxation in the country,” he said. “I can never resist pointing out depending on which community you live in it can be from one third to one fifth of the average rate in Illinois.”

The lower tax rates make Indiana a more attractive place for businesses and their executives to relocate, Brown said.

Also, Daniels said Indiana is in the process of phasing out its inheritance tax.

The reason was simple he said, wealthy individuals were retiring to states without inheritance or estate taxes so more could be passed on to their heirs. This meant less money was being invested in Indiana, given to Indiana charities or spent with Indiana businesses.

Illinois currently has an estate tax with a top rate of 16 percent.

The key to lowering taxes was cutting government spending, Daniels said.

Daniels said he did this by creating automatic refunds to taxpayers once government reached a certain size and had adequate levels of savings.

“You’d be amazed how much government you’d never miss,” he said. “In other words, people who have some very direct special interest in it may miss it and they’ll make a lot of noise, but for the average citizen there’s all kinds of government that the average citizen does not benefit from and wouldn’t notice, doesn’t notice, if there’s less of it or if it goes away completely.”

Regulatory environment

Jerry Huot knows the frustration of dealing with state bureaucrats firsthand.

The Kankakee-area businessman operated a chain of convenience stores across eastern Illinois for decades. In fact, his family has been in the petroleum-marketing business for 103 years.

The company has the oldest motor fuel tax number in the state of Illinois. So, regulations were nothing new for Huot.

But he said over the past decade Illinois’ business climate has become repressive.

For years, a private firm licensed by the state inspected the calibration on his store’s gasoline pumps to ensure they were dispensing fuel accurately.
 


Then the state stepped in, insisted on doing it themselves and charging gas station owners more.

“The state kept jacking up the fees to inspect our gas pumps. It had absolutely nothing to do with covering the cost of the inspection. They viewed it as a revenue stream because the state was short on money,” Huot said.

Huot sold his Illinois gasoline stations this year but continues to operate a wholesale petroleum business that operates in both Illinois and Indiana.

“Indiana is much easier state to do business,” Huot said. “When we interact with their state revenue department, they are much more responsive.”

Indiana has strived to change its regulatory environment, says former Indiana Gov. Mitch Daniels, who Illinois News Network interviewed earlier this month.

Daniels had this to say about what business leaders ask themselves when contemplating whether to invest in a particular state: “Is this a place where they’re going to regulate me in an onerous way or unpredictable way, which turns into money? Are they fast or slow giving me guidance or answers? Time is money, I used to tell people. It’s not just a figure of speech, its literal truth.”

Elmhurst businessman Randy Truckenbrodt agreed saying, “Indiana has just gotten out of the way of us doing business. Illinois hasn’t. Workers compensation costs are much higher in Illinois than in Indiana and there are other costs that make Indiana a much easier place to do business.”

Truckenbrodt started his business 38 years ago. It rents construction equipment and manufactures refrigeration paraphernalia and also does business in both Illinois and Indiana.

“What’s happening in Indiana is businesses are moving there. It seems to be a broad spectrum of companies. We are there. We have not received any harassment whatsoever. Here in Illinois, my business had a sales tax audit once during its first 32 years. … But in the last six years he has had three sales-tax audits.“

Truckenbrodt contends this is state-sponsored harassment.

“The cost to the company is huge. The state (auditors) make unrealistic claims,” he said. “Every time, I appeal, I win. And the state screws down tighter and tighter. … We haven’t even finished our last audit and they are ready to start another one. I just went in and told the auditor. This is the last one you are going to do, because when I am done here, I’m moving the company to Indiana. … I’m not going to spend money defending myself – if you don’t want us here, we’ll go away.”

Truckenbrodt’s said his companies, which employ 160 people, do business in Illinois, Indiana, Tennessee and Florida.



“Illinois is the only place I can expect to be audited year after year after year,” he said. “I’ve always been proud to have been from Illinois. But it recent years, when I tell people from out of state that I’m from here, I get a snicker. And I have to say ‘I know, I know.’ We are known for things that we just shouldn’t be known for.”

One of those things is high workers compensation rates.

According to 2014 study conducted by the state of Oregon, Illinois has the seventh-highest worker’s compensation rates in the nation. And North Dakota is the only state with lower workers compensation rates than Indiana. Work Comp Comparisons

Worker’s compensation is the insurance all employers must buy to compensate employees injured on the job.

Eric Doden, who is president of the Indiana Economic Development Corp., said worker’s compensation has been one of the things corporate CEOs relocating to Indiana have told him is a major factor to their decisions.

But Doden said businesses leaving Illinois for the Hoosier State are also disillusioned with the Land of Lincoln’s higher taxes, regulatory environment, government inefficiency and perceived lack of responsiveness to the needs of business.

“We would love to see Illinois improve itself – dramatically,” Doden said. “We would love to see Illinois get better. But when they are not getting better in what they are doing and they are consistently underperforming as a government then we are going to continue to put pressure on them to get better performance.“

Doden said that explains the “Illinoyed” billboard campaign his agency is conducting throughout the Prairie State to lure jobs and businesses to Indiana.

“We have made it no secret – we want to embarrass Illinois into better performance. As a region, we need them to perform better.”

[This article courtesy of Watchdog.]

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