|The Sears Tower in Chicago is now the Willis Tower.|
Sears Holdings, the parent company of K-Mart and Sears Roebuck, announced this week that it is considering a move from its current corporate headquarters in Hoffman Estates, Ill. to Georgia reports Chicagobreakingbusiness.com. Other states also being considered as the new headquarters of Sears include New Jersey, Ohio, North and South Carolina, and Texas.
The move comes four months after Illinois legislators voted a massive tax increase package into law. According to the N.Y. Times, Illinois tax corporate tax rates increased from 4.8 percent to seven percent under the new law. This is an increase of 68 percent. Additionally, individual income taxes in Illinois also sharply increased from three to five percent.
The Illinois tax increases were passed in January 2011 just before many of the lame duck Democrats left office to make way for the larger Republican contingent that was elected in November 2010. Although the numbers of Republicans increased, Democrats still control the Illinois legislature and Pat Quinn, a Democrat, is governor. The intent of the tax increases was to answer the state’s budget crisis, which includes a $13 billion deficit, an underfinanced pension plan, $8 billion in unpaid bills, and a deteriorating bond rating according to the Times. The tax increases were projected to bring in $6.8 billion annually.
Now it seems as though the predictable effect of the massive tax increase is to drive even more businesses out of the state. This will ultimately erode the tax base even further and compound the state’s financial woes. If Sears leaves Illinois, state and local governments will also lose tax revenue from the 6,200 jobs that will leave with the company’s headquarters. Local economies will suffer as those employees no longer patronize other local businesses. The projected increase in tax revenues is likely to never materialize.
Sears has been a resident company of Illinois since 1887. The company moved from downtown Chicago in the 1990s and relocated in a suburb, Hoffman Estates. The company is the recipient of numerous state and local tax incentives, which the Atlanta Journal-Constitution reports are set to expire in 2012. Gov. Pat Quinn and other officials are undoubtedly in negotiations to create a new incentive package that will entice Sears to stay in Illinois.
A comparison of corporate tax rates on taxadmin.org shows that Illinois is higher than all the possible homes for Sears except New Jersey. Both Illinois and New Jersey have effective corporate tax rates of nine percent. Both Ohio and Texas have very low corporate rates that are dependent on the sector of business for the exact percentage rate. Georgia’s corporate tax rate is far from the lowest, but at six percent is definitely more favorable to business than that of Illinois.
For employees and officers of the company, Sears is probably also looking at individual tax rates. According to taxadmin.org figures, Illinois fares somewhat better in this category with a flat rate of five percent. South Carolina is arguably the highest on average with a flat rate of seven percent. Georgia, Ohio, New Jersey, and North Carolina have several brackets with varying rates. New Jersey has the highest top rate at 8.97 percent. Georgia’s individual tax rates vary from one to six percent based on the tax bracket. Texas is the most favorable state from an individual tax perspective since it has no individual income tax.
The practical effect of the different state policies on taxation can be seen in the 2010 census. The population of the United States grew at 9.7 percent. Illinois’ population rate was far slower at 3.3 percent. Of the states that Sears is considering, only Ohio’s anemic 1.6 percent rate of growth is worse than Illinois. New Jersey is only slightly better at 4.5 percent. The remaining states competing for Sears’ headquarters have population growth rates in excess of fifteen percent. Georgia’s growth rate was 18.3 percent. The only state with a negative growth rate was Michigan, which lost over 54,000 residents.
Population growth translates into political power in the House of Representatives. Illinois and New Jersey each lost one representative in the congressional reapportionment. Ohio lost two and North Carolina’s congressional delegation remained the same. Georgia and South Carolina each gained one congressional seat, while Texas gained a phenomenal four seats.
The Sears announcement is further proof of the fact that tax rates and economic growth share an inverse relationship. As tax rates go up, companies hold their capital in reserve or flee to more friendly business climates and the economy slows. Conversely, when tax rates are lower, businesses invest and grow. Part of that growth is businesses that are coming from areas with higher taxes and more regulation.
When governments negotiate incentives for companies to relocate into their state, it is a win-win situation for both the state and the company. The company benefits from lower taxes and a better bottom line, while the state benefits from new jobs, a larger tax base, and economic growth that trickles through the community. Workers with new jobs have more money to spend on everything from housing to groceries which benefits local businesses.
The only loser is the state that raised its tax rates in a misguided attempt to solve a spending problem on the backs of its businesses and citizens. The promised billions in tax revenue never materialize as the tax base shrinks and the state takes an ever larger portion of a shrinking economic pie.