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Giving Tax Breaks to Large Corporations is a Fool’s Errand

Given the state’s deep financial problems and the pending loss of billions of dollars in revenue, Governor-elect Rauner and the Illinois Department of Commerce and Economic Opportunity should think twice – and then a third time – about giving out tax breaks such as the one just announced by the Quinn Administration for Medline, a large medical supply distributor in Lake County.

Little justification has been given for the nearly $18 million in breaks for Medline, except for vague references to Medline’s apparent threats to move its headquarters out of Illinois. Such threats would seem hollow given the statement from the company’s Chief Operating Officer about its “strong foundation [in Illinois] that has been developed over many years.” 

There are several compelling reasons not to play this game in the future. They center on the bread-and-butter issues that really matter most for businesses and hold the key to broad prosperity: creating a high-quality workforce through world-class schools, improving transportation and other critical infrastructure so businesses can efficiently reach markets, and creating livable communities that attract people from around the world.

Here’s a closer look:

Location Decisions are Almost Never Really About Taxes

Over and over,  when business leaders are candid they say they decide where to locate based on the quality of the workforce, proximity to large markets, and access to high-quality infrastructure including roads, ports, airports, and public transportation. 

Paul O’Neill, former CEO of Alcoa and Treasury secretary under President George W. Bush, once testified before Congress:

“I never made an investment decision based on the tax code. If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements.”

Former New York City Mayor Michael Bloomberg, founder (and soon-to-be CEO again) of the financial data and news company Bloomberg, similarly has said:

“Any company that makes a decision as to where they are going to be based on the tax rate is a company that won’t be around very long. If you’re down to that incremental margin you don’t have a business.”

Potential Tax Breaks are Small Potatoes to Large Corporations 

As O’Neill pointed out, if free money is being offered, executives won’t turn it down.  But, they almost never base their decisions on what actually are relatively paltry sums in relation to the companies’ bottom lines. The $17.5 million in tax breaks for Medline is spread out over 15 years —an average of $1.17 million a year. That represents about 0.02 percent of Medline’s $5.8 billion in revenue last year. It’s no wonder that O’Neill and Bloomberg question the business skills of executives who would be influenced by such a small amount.

Illinois Can’t Afford to Give Away More Money

Our state already chronically underinvests in vital priorities such as K-12 schools, universities, and transportation infrastructure — all keys to a strong economy. And it could get much worse. The state will have to make billions of dollars in additional cuts if lawmakers fail to maintain stable revenue beyond the end of this year, when current income tax rates are set to expire. A state that is already failing to make basic investments can’t afford to give unnecessary tax inducements to large corporations. Doing so will only make the state’s financial situation worse and hamper the effort to build long-term economic strength.

Companies Have Every Incentive to Mislead States  

Companies have every incentive to appear undecided about whether they will stay or leave. After all, if politicians knew that executives had already made up their minds about where to locate their companies, they wouldn’t support giving away money. Corporations have gotten very good at playing states off against each other. After all, if they might be offered free money by politicians who think they can influence the company’s decision, why turn it down? So companies often hem and haw, claiming they could go either way on a decision to relocate or not, and watch the offers come in.  

Giving Away Money to Large Corporations is Counterproductive and Grossly Unfair

Good Jobs First, a national group that calls for accountability in corporate tax giveaways, makes clear how arbitrary and ineffective tax giveaways are: “a tiny number of companies get huge subsidies,” but the number of jobs at stake “is microscopic.” When money is given away, all the companies who stayed end up receiving lower-quality public services, paying higher taxes — or both. Even worse, the lost revenue means the state cannot invest in job-creation strategies with a bigger long-term payoff, such as quality schools, affordable higher education, efficient transportation, safe communities, and other services.

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Posted to Blog, Economy, Revenue, Taxes

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