It?s the economy, Gov. Blagojevich

Will Illinois? new chief executive be good or bad for Illinois business?

by Maura Webber

Since its role in the Enron financial scandal was revealed in 2001, the once-mighty Chicago-based Andersen accounting firm has been reduced to a shell of its former self. Last October, home appliance maker Maytag announced it will pull its refrigeration production out of Galesburg in the northwestern section of the state and move it to Reynosa, Mexico, to cut costs. In December, United Airlines, headquartered in the Chicago metro region, filed for bankruptcy.

Over the past couple of years, the steady drumbeat of bad news on the Illinois business front has been undeniably grim. As Rod Blagojevich settles into office, many business interests fear the state’s first Democratic governor since the early 1970s will move to add insult to injury.

For starters, says Douglas Whitley, president of the Illinois State Chamber of Commerce, there’s concern the new administration, facing by some accounts a $4.8 billion budget deficit, will target business taxes to help make ends meet. And there’s worry Blagojevich, backed by a Democrat-controlled legislature, will make the state a less attractive place to do business by increasing corporate expenses, including the cost of insurance for workers who get hurt on the job.

Still, Whitley and others hope the administration will weigh the difficulties businesses face in a sour national economy, and the ripple effect those difficulties can have through lost jobs in Illinois. The U.S. unemployment rate returned to its April high of 6 percent in November, according to the federal Bureau of Labor Statistics. And stock markets weathered their third-straight losing year since the tech crash first took the air out of the markets.

Given this, the governor would do well, Whitley says, to embrace former President Bill Clinton’s refrain: “It’s the economy, stupid.”

The son of an immigrant steelworker, Blagojevich would appear to favor the interests of workers. Yet during his campaign, he positioned himself as a pro-growth candidate who understands the changing economic challenges employers face, as well as the struggles of their employees. After the election, members of his transition team acknowledged this will be a painful time for business and nonbusiness interests alike.

“This is a state that understands we’re in a moment in time that is difficult, that we need to pull together and that we’re all going to have our fair share of sacrifice,” says David Wilhelm, who headed Blagojevich’s transition. “But we’ve got to do it in a way that has an eye to future growth, and that’s what Rod is all about.”

Illinois isn’t alone in this dilemma. Over the next year or so, states will wrestle with some of their most difficult fiscal problems since World War II, according to the Illinois Tax Foundation, the research arm of the Taxpayers’ Federation of Illinois. Some two-thirds of the states report falling revenues and more than half report that spending will exceed revenue in this fiscal year, according to the National Conference of State Legislatures’ November State Budget Update. All 50 states have a total budget gap of $17.5 billion to fill before this current fiscal year ends, and Illinois is one of 24 states where legislatures will be trying to make ends meet with new governors.

It’s likely many solutions to the economic crunch, be they cutbacks, tax hikes or economic development incentives, will affect businesses’ bottom lines. Last year, for example, some states trimmed their economic development budgets. In the last couple of years, some moved to boost targeted industries. Maryland, New York, Ohio and Washington, for example, enacted measures to expand or authorize gambling to pull in more revenue. Still others are taking a long-range tack by approving tax incentives designed to encourage the growth of venture capital, a concept Illinois’ new governor supports.

In fact, support for new business ventures was central to Blagojevich’s economic platform during his campaign. Dubbed “Partnership for a New Economy,” the plan aims to create about 50,000 jobs through start-ups.

It calls for establishing a state-secured venture capital program, the Illinois Opportunity Fund, to encourage investment in downstate Illinois. It also proposes creating more than 20 entrepreneurship centers and revitalizing the state’s coal industry.

The fund would be modeled after an Oklahoma program that encourages private investors to put their money into venture partnerships. No public money is invested. Instead, that state offers tax credits if regular rates of return on private investments don’t materialize.

In late December, Wilhelm pointed to the plan as evidence of Blagojevich’s pro-growth approach. He noted the program, with a budget that will include only minimal administrative costs, is important if the state, known for its manufacturing prowess, is to remain competitive in today’s global and high-tech world. “This is a perfect time for us to organize for the future to develop access to capital,” Wilhelm says. “We’ll be ahead of the curve. The economy will bounce back, and we will be among the nation’s leaders.”

But judging by the experience of the Oklahoma Capital Investment Board, the benefits won’t be evident overnight — or even for several years. Robert Heard of Institutional Equity Associates, which manages the Oklahoma venture capital agency, is quick to acknowledge it’s a long-term game. The board was established in 1991 and made its first investment in 1992, he says. To date, Oklahoma entrepreneurs have received about $87 million in equity investments from partnerships the board has supported. Further, the board has made about $31 million in small loans to companies.

Oklahoma doesn’t calculate job creation, in part because Heard believes such tallies would encourage the board to stray from its mission of supporting entrepreneurs in favor of recruiting existing manufacturers to the state, businesses that are more likely to bring high numbers of jobs.

Still, Heard says that over the years the board has had considerable success in making the culture of Oklahoma more entrepreneur-friendly. It has helped to transform a small western theme park into Six Flags. Based in Oklahoma City, Six Flags is now one of the largest theme park management companies in the country. Beyond that, the influx of capital into Oklahoma has helped turn biotech discoveries at the state’s medical centers into viable businesses — and keep them in that state. Previously, entrepreneurs often fled with their ideas to other states, Heard says.

“It takes a long time, but if you put in place an industry that’s prepared to serve entrepreneurs, then you have the resources when bright ideas surface,” says Heard, who notes that the venture capital board has accomplished its goal without costing the state any money. “By doing that you begin to change the culture.”

While some entrepreneurs might be encouraged by the venture capital concept, Greg Baise, president of the Illinois Manufacturers’ Association, dismisses it as nothing but empty campaign rhetoric. The real litmus test for the Blagojevich Administration’s growth-friendly stance, he argues, will be in how it affects the basic expenses that businesses must bear to operate in this state. “We’ll get a sense of [which way he is leaning] very quickly.”

In fact, Blagojevich’s first opportunity to set the tone for his administration could come as early as this spring. Two Democratic lawmakers are expected to push measures in this legislative session that are designed to reap state revenue in the short-term by repealing three business tax breaks. Eliminating all three breaks would save state government nearly $200 million annually, according to the plan’s proponents.

Sen. Patrick Welch of Peru and Rep. Larry McKeon of Chicago want to change a formula companies use to calculate their corporate income taxes, repeal a tax break given to retailers to cover the costs of collecting state sales taxes and shorten the period of time companies can claim operating losses.

Welch also wants businesses to prove that past tax breaks have created the promised number of jobs or risk losing the perks. “It’s a kind of means testing for businesses,” Welch says. “Everyone is going to have to kick in their fair share to get through this crisis.”

Repealing the so-called single sales factor, a formula used for calculating corporate taxes, would be most lucrative for the state: an estimated $100 million a year. Actually, the proposed repeal would reverse an earlier change in the formula. Until a few years ago, corporate taxes were based on a combination of in-state sales divided by out-of-state sales, payroll and property. But in the late 1990s the formula was changed so that taxes were based only on in-state sales divided by out-of-state sales. This change unfairly benefited large multinational corporations because in-state sales are sometimes a small percentage of a large company’s profits, critics say.

Welch and McKeon also want to repeal a tax break given to retailers to help cover the cost of calculating and collecting sales tax, a provision first enacted in 1950. The provision allows retailers to keep 1.75 percent of the sales taxes they collect. That might have made sense several decades ago when record-keeping was more laborious, but today’s computers have made the process much easier and less costly, say opponents of the refund. Repeal, or at least a cap on the size of the companies eligible for the break, could realize about $47 million for state government and $22 million for local governments, Welch says.

The two Democrats also wouldmodify the so-called “net operating loss deduction,” eliminating the ability of companies to revise the previous year’s taxes to account for a loss. Their proposals also would reduce the length of time a loss can be carried on the books. Depending on the details of the legislation, the modification of this business tax break could allow the state to realize between $30 million and $50 million, Welch says.

Supporters of these initiatives include Ralph Martire, executive director of the Center for Tax and Budget Accountability, a Chicago-based bipartisan group that aims to represent the interests of the poor in the state’s tax policy debates. In fact, Martire thinks the state will need to look for even more cuts and estimates that there are nearly $1 billion in assorted business tax breaks that should be on the table. It’s only fair, Martire says, considering that companies were spared during last year’s budget crunch while the state slashed health care and education spending.

Martire also supports decoupling Illinois’ estate tax from the phase out of the federal estate tax. As it stands, Illinois is slated to phase out this tax over the next 10 years, with the loss to state coffers rising to $465.8 million in 2007. While this is not a business tax, it would affect the estates of the state’s wealthiest residents, meaning the move could make Illinois less attractive to corporate executives. But because the tax affected only 2,950 of the wealthiest estates in 1999, Martire argues it would be more equitable for Illinois to follow in the footsteps of 11 other states, including Wisconsin, Minnesota and Oregon, and break from the federal fiscal policy. “This is tantamount to giving a huge tax break to the wealthiest of the wealthy,” he says.

There is at least one proposed business tax that has garnered some support from the state’s retail community. Supporters of the streamlining initiative are hopeful that about 32 state legislatures will enact laws this year to simplify sales tax laws in order to make it easier for catalogue and Internet companies to collect state sales taxes for the state where the buyer is located. Currently the buyer is responsible for paying this so-called user tax, but officials say it typically goes unpaid. David Vite of the Illinois Retail Merchants Association says the state will be missing out on collecting an estimated $1.17 million annually by 2005 if no change is made. He says the move, which would essentially level the playing field for retailers of all types, would not constitute a new tax.

Though tax policy is paramount for business interests, there are other policy decisions they expect Blagojevich to weigh in on. One is labor’s interest in reinstating the Structural Work Act. Also known as the Scaffold Act, the law was enacted in 1907 and is designed to give recourse to workers injured from falling off scaffolds, as the name implies. But in 1911, Illinois approved the Workers’ Compensation Act, which covers all types of job-related injuries. Business pushed to repeal the Structural Work Act in 1995, arguing injured workers were being paid twice for the same incident. Reinstatement of that law would boost insurance costs for construction companies and make Illinois the only state outside of New York with such legislation, opponents say. “In essence, it gives two bites of the apple,” Whitley says. “It would unnecessarily increase the cost of construction.”

For his part, Blagojevich was treading carefully as he prepared to take office. He was scheduled to issue his first budget proposal to lawmakers on the 19th of this month, but he was expected to ask for a 30-day extension. Wilhelm says Blagojevich was working to address the deficit. The administration is likely to consider a range of long- and short-term options. On the table are a variety of business tax breaks. And Wilhelm says the administration will review whether those breaks are providing intended benefits. Beyond that, the Blagojevich team is considering reorganizing its economic development agencies, the departments of Labor and Commerce and Community Affairs. Labor also will be looking for Blagojevich to make good on his campaign promise to hike the minimum wage from $5.15 an hour to $6.50.

But Wilhelm rejects the notion that the administration will simply side with labor against business. He suggests instead that Illinois government, along with the state’s corporations and labor unions, must take a new unified approach to solving the current fiscal problems.

“We’ve got to get away from the old way of looking at things that says the interest of business and labor groups are somehow at odds. It’s a false choice,” Wilhelm says. “We need to think differently about the economy of the future, which means we need to become a much friendlier state when it comes to capital.”

Illinois Issues, February, 2003

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