When Gov. Pat Quinn signed a law this winter boosting Illinois’ corporate income tax rate, he was hardly its only fan. The governors of Indiana and Wisconsin could barely contain their glee. 

Indiana Gov. Mitch Daniels compared Illinois to The Simpsons on Chicago radio. The mayor of his state’s capital invited Illinois businesses to become Hoosiers with a full-page ad in the Chicago Tribune. And as Indiana lawmakers considered a two-year budget proposal designed to get rid of a structural deficit of merely $700 million, their budget director, Adam Horst, pointed to Springfield.

“This is a monstrous jobs-killing bill in terms of what Illinois has just done,” Horst says. “It makes our competitive situation even better.” 

Meanwhile, newly installed Wisconsin Gov. Scott Walker dusted off his state’s old “Escape to Wisconsin” slogan, and his lieutenant governor says she started making phone calls to firms in Chicago and Crystal Lake. “Illinois has made some significant missteps,” Wisconsin Lt. Gov. Rebecca Kleefisch says. 

Daniels and Walker, both Republicans, want to capitalize on an Illinois tax increase they see as a massive policy blunder. 

Quinn’s staff says Illinois’ budget storm will be calmed by the tax hike, and they say businesses can’t escape it by simply moving away. But all sides say businesses want to invest in a stable environment, and that’s what they’ll look for when they decide whether to continue investing in Illinois. 

“If you are a business and you’re looking for some certainty in climate, I would argue that that’s important,” says John Ketzenberger, president of the Indiana Fiscal Policy Institute. “And that’s a major difference between the states at this point.”

It’s tough to make apples-to-apples tax comparisons between states. Credits and exemptions muddy the waters. Local taxes and fees vary. That doesn’t stop analysts from trying, but their studies can differ, too. 

The law that Quinn signed in January raised Illinois’ corporate income tax rate from 4.8 percent to 7 percent. In 2015, it will drop to 5.25 percent, and in 2025, it will return to 4.8. Indiana’s corporate income tax rate is 8.5 percent, and Wisconsin’s rate for businesses is 7.9 percent. 

After Walker began his campaign to poach Prairie State businesses, Illinois Senate President John Cullerton responded by pointing out in a news release that his state’s corporate income tax is still lower than Wisconsin’s. That’s true, but Kleefisch says he left out the 2.5 percent replacement tax added to Illinois’ corporate rate, a tax collected by the state for local governments in place of a personal property tax. Kleefisch says that gives Illinois an effective corporate income tax rate of 9.5 percent — higher than Indiana and Wisconsin. 

The communications director of the Illinois budget office calls foul here. “If this number is used, then for comparison purposes with other states, one must include other states’ personal property taxes that are levied,” Kelly Kraft says.

John Tillman, chief executive officer of the Illinois Policy Institute, says his agency looked at all state and local taxes, including fees, that individuals and businesses pay to live in Illinois or over one of its borders. 

“Blend in total tax burden,” Tillman says of Illinois, “we’re much higher.” 

In a report published before the tax increase, the Illinois Policy Institute found the tax burden per capita in Illinois is $4,346, placing it 14th among all states and the highest among its neighbors. 

The Center for Tax and Budget Accountability had a different take. Ralph Martire, its executive director, says his group studied Illinois’ state and local tax burden as a percentage of income. He says it ranked 44th in the nation before the income tax increase. Once his organization gets the data needed to study Illinois after the increase, he says he expects it will jump to about 37th or 36th. Martire says other studies that include federal taxes are skewed because Chicago and its suburbs are “loaded with millionaires” who pay a lot in federal taxes, Martire says.

Finally the Tax Foundation, a research group based in Washington, D.C., accused Illinois of enacting the nation’s fourth-highest corporate tax rate. It again used the 9.5 percent figure. The Tax Foundation had ranked Illinois 27th nationally (with No. 1 being the lowest) on its 2011 ranking system for states’ corporate income taxes. The group says it would have dropped Illinois down to 45th had Illinois’ new tax rate been in effect last July. 

“The enacted tax increases will severely impact Illinois’ attractiveness to business and individuals,” the Tax Foundation concluded. 

Next door, Indiana’s governor gets a lot of attention from fiscal wonks — including some looking for a GOP White House nominee in 2012 — for the way he’s managed state spending. At the start of Fiscal Year 2012, Indiana expects to have $678 million in reserve. That could give peace of mind to businesses worried about Illinois’ more than $6 billion in unpaid bills. “It’s less likely [Indiana] will have a tax increase like they did in Illinois,” Ketzenberger says. “There won’t be a deficit to address. The state of Indiana has a AAA bond rating right now. That’s important to people.” Daniels’ staff promises to use some of its reserve money to float Indiana through the end of fiscal year 2013 and make sure there’ll be no tax hike. But by the end of that budget cycle, they hope to grow the reserve fund to $724 million. 

Indiana’s legislature also spent time this winter trying to fix Indiana’s broken unemployment insurance fund, which owes about $2 billion to the federal government. That could mean a premium increase for the state’s businesses, and Ketzenberger says that “could have an effect on the calculation” when business owners decide where to invest. 

Indiana created its general fund surplus by cutting several costs. Daniels decertified Indiana’s state employee unions through an executive order issued on his first day in office in January 2005. The state reports that its roster of full-time active employees is down from about 40,000 in 1994 to about 29,000 in 2010. The last time Indiana had so few employees was 1982. The drop began under previous governors, and Daniels continued it.

Kraft provided a 2009 report that says Illinois boasted the nation’s lowest rate of employees per capita at the time: 54 employees per 10,000 residents.

Indiana cut K-12 education spending by 3 percent in 2010. About the same time, state spending on higher education took a 6 percent hit. Daniels is asking his General Assembly to hold K-12 spending flat in the next two years. He also suggested taking another 3 percent from universities.

Hoosiers are generally happy with Daniels, though, mostly because of a significant pillar of his tax policy. He persuaded his legislature to pass a set of property tax caps into law in 2008, along with a balancing sales tax increase from 6 percent to 7 percent. The caps took full effect in 2010 and limit Hoosiers’ property tax bills to 1 percent of assessed property value for homeowners, 2 percent for landlords and farmers, and 3 percent for businesses. 

Those caps are part of Indiana’s constitution after a voter referendum, and that makes them harder to change. Some opponents say it could take as many as five years to alter them. But the caps also cut off revenue for local governments. As a result, the Indiana General Assembly was looking seriously at a bill this year that would, for the first time, authorize Hoosier cities and towns to file for bankruptcy.

Rob Henken, president of the Milwaukee-based Public Policy Forum, says Wisconsin has its own set of property tax caps on local governments and schools. He says they’ve changed historically based on inflation or increases in construction. “It’s been tweaked in every biennium.”

Kleefisch says Wisconsin has a $3 billion budget gap to fill and unlike Indiana, Henken says Wisconsin’s reserves are depleted. “Wisconsin is going to close its budget hole not by raising taxes, but by cutting spending,” Kleefisch says. By late February, though, a Walker proposal to cut off collective bargaining rights for public employees drew thousands of protesting workers to the Wisconsin Statehouse. The state’s Senate Democrats fled to Illinois to stall the measure. Indiana House Democrats also left their state and shut down its legislature in February, but their protest was aimed at myriad labor and education bills that were not so central to state solvency.

Earlier, Walker’s press office says he signed a law that will give a tax deduction to small businesses for each job they create. The size of the deduction varies, depending on the size of the business creating the jobs. Illinois has a similar tax credit.

Also, Henken says, Wisconsin used to state balance its budget by using one-time revenues, shifting money between funds and putting off bills until the turn of the fiscal year. He says those options either aren’t available to Wisconsin’s new governor, or he’s not interested. 

Kleefisch says the Walker administration committed to creating 250,000 jobs in four years. As a part of that effort, she’s begun reaching out to businesses in Chicago and its suburbs. She wouldn’t name names. 

“When I make these calls to Illinois job creators, they understand, as I do, that relocating a company is quite a concept,” Kleefisch says. “The prospects of doing that are potentially costly. They want to know the true cost of doing business in Wisconsin. I’m able to provide them with the numbers that truly work out to their benefit.” 

Kleefisch’s phone calls mean Walker’s “Escape to Wisconsin” comments were more than political theater. The same goes for Daniels. A little more than a month after he made his Simpsons comment, new billboards went up in northwest Indiana and Illinois. They were part of the Hoosier state’s new marketing campaign: “Illinnoyed By Higher Taxes?” 

Indiana Commerce Secretary Mitch Roob says the state’s Economic Development Corp. is already getting unsolicited calls from Illinois businesses. They’re not necessarily sold on Indiana, he says, but they’re ready to look around. “They’re just motivated to leave Illinois,” Roob says. “At what point in time do you just become sick of it?” 

Doug Whitley, president and CEO of the Illinois Chamber of Commerce, says he’s ultimately more impressed with the case being made to his members by Daniels than by Walker. “Wisconsin is still a high-tax state,” Whitley says. “Make no bones about it.” 

But he says Illinois needs to stop sending negative signals to its business community. The income tax increase, he says, is just one example. “It’s sort of a death by a thousand cuts,” Whitley says. 

One Illinois business spoke right up after Quinn signed the income tax increase. Jimmy John Liautaud told reporters he’s thinking about moving the Champaign headquarters of his Jimmy John’s Gourmet Sandwiches company out of the state. 

Though that company was vocal about its displeasure with Illinois, Whitley says few businesses make an announcement when they decide to make an investment outside the state. “They just do it,” Whitley says. 

Kraft says Illinois’ corporate income tax structure was streamlined in the 1990s so corporations only pay taxes on profits earned from Illinois sales. She says the number of employees and the value of facilities in Illinois does not in any way affect businesses’ bottom-line tax bill. 

“The only way for the company to avoid paying Illinois corporate tax is for the company to cease selling their product to Illinoisans,” Kraft says. “Relocating out of Illinois will have no effect on the amount of money paid by a company to the State of Illinois.” 

Martire says businesses usually include taxes in their pricing structure, anyway. That’s one reason, he says, firms prefer predictability. “It allows you to forecast costs,” Martire says. 

Whitley, meanwhile, says Daniels and Walker might find more long-term benefits if they stopped trying to poach jobs from Illinois. He says they should instead be helping Illinois succeed. “I don’t understand why the Midwest governors would want to spend so much time trying to dance on the grave of Illinois when, indeed, the Midwest as a whole has common bonds,” Whitley says. “It’s a common economy, and we have a lot at stake.”

Jon Seidel covers the Indiana General Assembly for Northwest Indiana’sPost-Tribune. 

Illinois Issues, April 2011