Illinois is struggling.
Each year, CNBC ranks the 50 states based on a number of economic factors. These were the 2012 rankings of Illinois and adjoining states in the category of the strength of the state economy: Iowa (No. 3), Indiana (11), Missouri (29), Wisconsin (34), Kentucky (38) and Illinois (45).
The Atlantic Magazine also ranks states in a “Best and Worst Performing” list. In 2012, Illinois ranked 43rd.
In explaining its ranking, the magazine noted, “Illinois finds itself with such a low ranking in part due to its high unemployment (10.1 percent) and in part due to its high debt per capita ($9,613). The state also suffers from poor fiscal governance, and received a credit rating of A+, the second worst S&P rating granted to all of the states.” (S&P has four credit ratings higher than A+. These are AAA, AA+, AA, and AA-.)
Another publication, 24/7 Wall Street, also ranks “The Best and the Worst Run States in America.” In 2012, Illinois ranked 48th, with a 40.2 percent budget deficit (the second highest of any state in the nation).
Recent articles have highlighted the dire financial straits of the state. Interestingly, most of the people interviewed for these articles seem to focus on two solutions: cutting expenses by cutting services and/or raising taxes.
Very few point to the real solutions: Increasing tax revenue by attracting new business to the state and providing a business-friendly environment for existing businesses to grow.
Keys to a strong economy
No matter the size of the economy, the only way for it to grow is by bringing in more money than it sends out, and that is achieved primarily by shipping more products out than it brings in. The keys here are vibrant manufacturing, mining and/or agricultural sectors.
People seem thrilled when new retail outlets open in their community, thinking it brings in money and improves the economy.
Actually, retailing has the opposite effect.
A strong retail sector is a result of — not a cause of — a strong economy. Retail operates by bringing goods into a region, and then sending the majority of the money earned from sales back to the manufacturers. Indeed, a portion of the money remains in the community in the form of low wages and taxes to local governments. However, if a local economy goes south, retailers have to close their doors, because there is no more money available to send back to the manufacturers.
Manufacturing, mining and agriculture have the opposite effect.
A community with a strong manufacturing, mining or agriculture base has a vibrant economy. The reason is that employees in these industries — who often earn high wages — create, mine, grow and process products that are shipped to other regions, states and countries. In return, money comes pouring back into that community.
Problems in Illinois
Governments survive on taxes.
Bringing in a lot of taxes can provide a lot of services, which can keep a lot of people employed. However, if tax revenue decreases, then local, regional and state governments must cut back on services and, eventually, personnel.
While about half of Illinois’ tax revenue comes from sales taxes, motor fuel taxes and excise taxes, the other half comes from corporate income taxes and individual income taxes (most of which is paid by people who are employed in business or government jobs). Thus, if a government wants a healthy source of tax revenue, it needs to make it as easy as possible for existing businesses to grow and export and make it as attractive as possible for new businesses to set up.
Some state governors and legislatures have known this for decades and have worked continuously to promote business growth. Illinois is not one of those states. In fact, many Illinois politicians spend an inordinate amount of time, effort and money to make it as difficult as possible to attract and retain business, with high business tax rates, high workers compensation tax rates, etc.
For example, while the top state corporate income tax rate is 6 percent in Kentucky, 6.25 percent in Missouri, 7.9 percent in Wisconsin and 8.5 percent in Indiana, it is 9.5 percent in Illinois. Iowa is higher with 12 percent.
Things are just as bad when it comes to workers compensation rates.
In a ranking of states, with 50 being the lowest (most desirable) rate, and 1 being the highest (least desirable) rate, Indiana is 50, Missouri is 36, Iowa is 25, Kentucky is 22 and Wisconsin is 12. Illinois is 4.
According to the Illinois Policy Institute, a non-partisan research group focused on free market principles, the National Establishment Time-Series, a database of Illinois businesses, found that between 1995 and 2009, Illinois ranked 48th in the country in generating jobs from the creation of new businesses. In addition, Illinois ranked 50th in total job creation, being one of only six states to lose jobs between 1995 and 2009.
This tough business climate will make it difficult to take advantage of an emerging global middle class, described by Joel Leonard, former vice president of the Association of Facilities Engineers; chairman of the Workforce Advisory Committee of the National Defense Industrial Association; and founder and president of SkillTV.net. Leonard also devotes time to teaching engineering and technical classes to employees in companies worldwide.
“It's to the point now where the American Dream has become the International Dream. The global middle class is expected to become a $5.1 trillion market, so there will be a lot more people with disposable income willing and able to buy products that they never could afford before,” he said.
From the outside
During the past interviews, executives of national companies and consultants with national site selection consulting firms had very positive things to say about states such as Indiana, Wisconsin and Iowa. They were particularly impressed with Indiana’s recent strong economic growth, which is largely a result of its pro-business state government.
Ed Schreyer, executive managing director, Brokerage Americas, for CB Richard Ellis (Dallas), one of the nation’s most respected site selection consulting firms, noted that, “During the downturn, a lot of companies consolidated their operations as a way to improve economies of scale and reduce their real estate costs.”
For example, a company might have four facilities, close three of them and combine everything at the fourth location. The result: One winner and three losers.
“In a lot of cases, the winners ended up in the Midwest, based, of course, on the geography that is so important for the hub and spoke strategy,” Schreyer said.
More specifically, certain cities in the Midwest are seeing significantly more growth, according to Schreyer. One of these is Indianapolis. In fact, he said, this city survived the downturn much better than most.
“One reason Indiana is attractive is that we are in a good fiscal position,” David W. Holt, vice president, operations & business development, and chair of the Conexus Indiana Logistics Council, said. “Our governor has really focused on making sure we are financially stable, in addition to being a low tax state.”
Tim Feemster, senior managing director for Newmark Grubb Knight Frank (Dallas), another site selection consulting firm, agreed with Schreyer on the growth of businesses in the Upper Midwest.
“There has been a lot of resurgence in the Rust Belt areas,” he said. “For example, Indiana has seen a lot of growth, especially since it expanded ‘right to work,’ which is a huge positive.”
Wisconsin has gone through some interesting politics, he said, but it doesn’t seem to have upset its business friendliness too much.
“It has been very business-oriented and worked hard to attract business,” he said.
However, when asked about Illinois, they all laughed — literally.
“Illinois has become relatively tax- and business-unfriendly,” Feemster said. “There are unintended consequences for the state’s decision to try to tax its way out of its problems. As a result, some companies have moved operations out of the state to Indiana and Wisconsin.”
According to the Illinois Manufacturers’ Association, manufacturing in the state employs about 575,000 workers directly, and the sector contributes 12.5 percent of the state’s gross domestic product, the single largest share of any sector in the state. But this is unlikely to increase unless some things change.
According to CNBC’s “Business Friendliness” rankings, Illinois is the least business-friendly state in its region, with Indiana at No. 5, Iowa at 10, Missouri at 25, Wisconsin at 27, Kentucky at 41 and Illinois at 46.
Each year, Site Selection Magazine (a publication aimed at corporate executives who are responsible for finding desirable locations to expand their businesses), lists the Top 25 states based on “Business Climate” rankings. Illinois is not on the 2012 list. However, four of five of our adjoining states are: Kentucky (11), Indiana (12), Wisconsin (13), and Iowa (25).
Forbes also ranks “The Best States for Business.” In 2012, rankings for “Business Costs” were Iowa (8), Kentucky (9), Indiana (11), Missouri (21), Wisconsin (35) and Illinois (36).
These rankings show that if a company were looking to expand in the Midwest, it would have little reason to consider Illinois. And, of equal concern, there are plenty of incentives for companies already in Illinois to move or expand elsewhere.
In March 2011, after Illinois’s decision to raise its corporate tax rate, Caterpillar Chief Executive Doug Oberhelman said he was considering moving the company’s corporate headquarters to another state. He did not.
Still, though, Caterpillar continues to grow, and it continues to open new manufacturing facilities. In 2012, Caterpillar opened a $200 million hydraulic excavator facility — in Texas. That same year, it announced plans to open yet another plant that will employ 1,400 workers — in Georgia.
Illinois’ poor business climate is holding it back. The state’s finances are among the worst in the nation, and the only thing that will solve the problem is the growth of business.
The bottom line is simple: Until Illinois’ politicians work to make the state attractive for new and existing businesses, this problem will remain.