January 29, 2012

The Cautionary Tale Next Door

The state of Illinois recently encountered some bad news. Moody’s downgraded Illinois’s credit rating from A2 to A1, the lowest in the country. On the other hand, Missouri has AAA ratings from all three credit agencies. Times have been tough for both states. Missouri is facing a large budget shortfall. Illinois has its own shortfall and it is using payment deferrals to manage its operating cash fund.

I mention our neighbor’s misfortune because it serves as an example of different approaches to handling financial difficulties. Last year, Illinois raised taxes on personal income and the corporate income. Yet, despite these increases, its financial situation continues to deteriorate. In Missouri, the tax rates have remained the same. Missouri Gov. Jay Nixon brags about not raising taxes and personally cutting $1.6 billion in government spending. While both states have a budget shortfall to close, which budget situation would you prefer?

Illinois officials’ reaction to the state’s financial difficulties also presents an opportunity. As I mentioned before, Illinois responded to its dire fiscal situation by raising its corporate income tax. This has already put pressure on the state’s own businesses, and other states (Wisconsin and Indiana) are trying to entice those businesses to relocate into their states. Missouri has had its own methods of trying to encourage companies to relocate to the state, but they tend to be costly. When the Missouri Department of Economic Development (DED) used tax credits to get Applebee’s to relocate to Missouri, the cost was about $35,000 per job.

Instead of handing out millions of dollars in economic development tax credits, why doesn’t Missouri eliminate the corporate income tax? Considering that Illinois just raised its corporate income tax, wouldn’t a corporate income tax cut (if not outright elimination of the tax) serve as a powerful incentive for Illinois companies to move to Missouri?

Missouri officials estimate receiving $352 million in corporate income tax revenue for fiscal year 2013. Missouri officials also estimate that the state will issue more than $450 million ($463,409,492, to be exact) in economic development tax credits for the upcoming fiscal year. A reduction in tax credits would enable the state to make up for any revenue shortfall it would encounter via the forgone corporate tax revenue and provide a more permanent, and more fair, incentive for businesses to relocate here.

Illinois is in an unenviable situation. Illinois officials’ handling of that situation serves as a reminder that tax increases are not a cure-all for a state’s budget woes. Missouri officials have an opportunity to head in the opposite direction from its neighbor; however, will Missouri legislators embrace a new direction (tax rate cuts), or continue with the status quo?

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