June 13, 2011
Caterpillar Inc. dropped a bombshell in March when its CEO Doug Oberhelman sent a letter to Illinois Governor Pat Quinn warning that Texas, Nebraska, Virginia, and South Dakota were wooing the Peoria-based firm to relocate its headquarters, and because of ‘anti-business’ moves in Illinois he was considering the possibility. Oberhelman pointed to $40 million in additional taxes Caterpillar’s more than 23,000 Illinois employees would have to shoulder from the state’s personal income tax increase in January.
“I never really considered living anywhere else and certainly never considered the possibility of Caterpillar relocating,” Oberhelman wrote. “But … policymakers in Springfield [the state capital] seem to make it harder by the day.”
Amid persistent high unemployment nationwide, pressure is mounting on state governments to keep large employers happy as they look to recover some of the more than seven million jobs lost during the recession, and retain those remaining within their borders.
“Companies are definitely in a stronger position to try and collect because of high unemployment rates,” said Kenneth Thomas, a political scientist at the University of Missouri-St. Louis. “Businesses see an opportunity, so it’s more likely we will see more subsidies, even if there is no tangible economic benefit to society of giving them out.” He has assembled data showing that states doled out $70 billion worth of fiscal incentives and subsidies to businesses in 2010. He has no estimates yet for 2011, but anticipates the dollar amounts will increase.
“If this seems like a time when states are more likely to open their purses because they are desperate, the behavior we are seeing in Illinois and elsewhere could increase,” said Therese McGuire, a state and local public finance expert at Northwestern University’s Kellogg School of Management.
In Illlinois, where unemployment has remained at about 9 percent through much of this year and last, there have been heaps of corporate tax breaks, despite the state’s precarious fiscal condition—among the five worst in the country according to a recent Forbes ranking. The state is on track to finish fiscal 2011, ending June 30, $8 billion in the red. Illinois also has the nation’s most underfunded pension system in the country at about 51 percent according to an April report from Pew.
State records show that in calendar year 2010 Illinois agreed to give $272.7 million in tax subsidies and incentives—more than double the previous year -- to 67 companies considering enticements from other states. In 2011 so far, the state has committed to $230 million in subsidies to 27 companies, including a $100 million deal for electronics manufacturer Motorola Mobility to keep its headquarters and 3,000 jobs, in Chicago suburb Libertyville. Another deal is being negotiated with Sears Holding Corp., which said last month it might move its headquarters and 6,200 jobs out of Hoffman Estates, Illinois, when its current tax subsidies expire this year.
“We are committed to investing in companies that are investing in Illinois, which are attracting, expanding and retaining businesses and jobs across the state,” said Marcelyn Love, spokeswoman for the Illinois Department of Commerce and Economic Opportunity. “Our business investment packages are creating and retaining more than 30,500 jobs and generating $4.23 billion in new investment in the state.”
Oberhelman softened his tone in an April news conference with Quinn, saying his warning was meant to encourage discussion aimed at improving the state’s business environment and he expects Caterpillar to stay in Illinois. The company declined to comment for this article.
States Open their Checkbooks
Last year, Pfizer relocated thousands of jobs from New York to New Jersey and Pennsylvania for tax purposes. Ebay Inc. and its PayPal arm left San Jose, Calif. to set up shop in Austin, Texas. They plan to add 1,000 high-paying jobs over the next ten years in exchange for a lower tax rate and a $4 million in state and local tax incentives.
A warning from e-commerce giant Amazon that it might abandon plans for a distribution warehouse in South Carolina last week yielded the Seattle-based company a tax deal. After Amazon upped its commitment to 2,000 full-time jobs with health benefits, and promised to invest $125 million in the state, it walked away with perks that included a free building site, reduced property taxes, roughly $25 million in economic- development tax credits and a five-year exemption from collecting sales taxes from South Carolina residents that could give it an advantage over other retailers.
Similarly, when card-maker American Greetings said it was considering moving its headquarters, with 2,000 jobs and $150 million in annual wages, from northeastern Ohio to the Chicago area, and had construction projects under way, Ohio approved a deal for $93.5 million in tax subsidies. Despite Ohio’s projected $3 billion budget shortfall for fiscal 2012, “We will wind up doing better than what we had to provide in terms of an incentive," Ohio Governor John Kasich told reporters after signing the deal in March.
“There’s a budget that needs to be balanced,” said Thomas Cooke, a professor at Georgetown University’s McDonough School of Business who specializes in tax ethics for business. “Obviously the pencil-pushers have figured out that one way to do that was to increase taxes. Companies are less than thrilled and appeal for incentives, and those that don’t then read that others have deals and will want the same treatment.”
But companies asking for tax breaks or subsidies often have no real intention to leave and are just jockeying for the best deal, said Fred Giertz, an economist and state budget expert at the University of Illinois at Urbana-Champaign. For Caterpillar, the sheer size, history, and profitability of the company make it hard to believe the company would up and leave Illinois and leave much of its workforce behind, he said. “But capital is mobile, and Caterpillar is a global company, so poor economic conditions and unemployment gives them more leverage in terms of the cosmetic aspect of remaining in the state.” Caterpillar, the world’s largest construction, mining, and machinery manufacturer, set down roots in central Illinois in 1909.
These sweetheart deals don’t always signal doom for the state budget, said Hartley Powell of the Global Location and Expansion Services Practice at accounting firm KPMG, who helps firms decide where to locate. “Unfortunately, sometimes you’ve got to spend money to make some money, so states hold out incentives to bring companies in, the company hires local people, salaries can go up, and now employees are paying payroll taxes,” he said.
And while tax subsidies may not help states’ budgets, they aren’t making it much worse, said David Brunori, who writes about state taxes for Tax Analysts. “States like Illinois and Ohio can’t afford to give out tax incentives, really, but it’s not going to bankrupt them anymore than they already are…$50 million or $100 million on top of a multi-billion dollar deficit is peanuts in the big scheme of things,” he said.
Illinois Business Reap Huge Tax Breaks (Chicago Sun Times)
Amazon to Start Looking for SC Workers Again (BusinessWeek)
House, Senate to Keep Historic Tax Breaks in Ohio Budget (Cleveland Plain Dealer)