Outrage Over Tax Breaks in Illinois

Posted: Feb 23, 2012 12:01 AM

In Crain’s Chicago Business, there was an article that said the $150M in tax breaks for Sears was money poorly spent.

“Rather than dole out that $150 million to one big company, how about this: Give $30,000 to 5,000 small companies to encourage them to locate in Illinois. By comparison, a successful Chicago-based accelerator — Excelerate Labs — funds 10 companies per year to the tune of $25,000.”

This is the wrong framework to look at tax breaks. Sears was going to leave the state. They would have taken 6,100 jobs with them. Those are taxpayers, not only on the state level but on the local level. Businesses like Sears create jobs slower than a successful start up might, but they offer a platform for start ups to build around. Viewpoints is a start up that is built around the Sears infrastructure.

It also assumes an economic fixed pie. Economies aren’t fixed. Like dark matter in space they can grow forever and in all directions if you don’t constrain them. It’s not a zero sum game. Also, the calculation of tax breaks related to the budget are always looked at with accounting numbers and not economic ones. Economic numbers are dynamic, and a tax break has been shown to have a 1:3 multiplier effect. For every one percent in the decrease of taxes, there is a corresponding 3% bump in GDP. Illinois ought to be cutting taxes to increase economic growth. Instead, they raised them.

Sears is also a likely acquirer of start up companies. Many companies like to invest in their own backyards. They want to invest in the local start up community. I know because I have spoken with corporations that are looking to make it happen. Additionally, having a big bell cow in one industry creates a lot of native industry DNA. Employees of Sears that discover unsolvable problems are likely to create an entrepreneurial company, or assist in the creation of one. It is most probable that they will do that in their own backyard. Employees don’t generally move to create start ups, although they can.

The real outrage in Illinois is over the total mismanagement of state and local finances. Democratic Cook County is an utter mess. The City of Chicago, a mess. The state has a pension nightmare. Last year, they raised corporate and individual taxes. They didn’t cut spending, and this year they don’t cut spending. Illinois needs to slash all kinds of programs and reconfigure their pension system from defined benefit to defined contribution-much like Indiana.

Illinois is losing established business because of the high taxes, and onerous regulatory environment. I am glad that the state extended tax breaks to CME($CME), Caterpillar($CAT), John Deere($JD), Sears and others to keep them in the state. If you lose the big businesses, the mom and pop lifestyle support businesses that exist because of them will go out of business too.

Then, there will be no start up ecosystem. No one will be left to start it.