Badger Institute: Illinois dysfunction, Wisconsin opportunity
How tax reform and transportation upgrades can help Wisconsin take full advantage of the festering mess that is Illinois
By JAY MILLER
Don’t kick ’em when they’re down, the adage goes. But when it comes to Illinois — Wisconsin’s dysfunctional neighbor to the south, grappling with a $5 billion tax increase, an unfunded pension crisis and an exodus by businesses and residents alike — it’s too tempting to resist.
So, go ahead, gloat for a moment. Then, let’s examine more closely what’s behind the migration and how the Badger State can more fully take advantage of Illinois’ ongoing missteps.
Since 2011 alone, a slew of businesses have moved their corporate offices or their entire operations from Illinois to Wisconsin. Prestige Metal Products Inc. will soon join the list, announcing in March a move from Antioch, Ill., to Bristol. Uline, distributor of packaging and shipping supplies that continues to rapidly expand and hire, may have sparked the trend in 2010, when it relocated its headquarters from Waukegan, Ill., to Pleasant Prairie.
In addition to the across-the-border moves, large corporations that might once have opted for Illinois instead have chosen southeastern Wisconsin for major facilities. For example, Amazon has opened two sprawling fulfillment centers in Kenosha; German candy-maker Haribo, which originated the gummy bear and whose U.S. headquarters is in Rosemont, Ill., is scheduled to open its first U.S. plant in Pleasant Prairie in 2020; and, of course, Foxconn Technology Group, the Taiwanese electronics giant, is planning to build and operate an LCD factory in Mount Pleasant in Racine County by 2020.
Even absent Foxconn, manufacturing jobs in Wisconsin have increased in the past year or so — by approximately 3,000 — according to the federal Bureau of Labor Statistics (BLS). During the same period, Illinois lost 6,500 manufacturing jobs.
When a state loses jobs and businesses, it eventually loses people as well.
Beset by horrific crime, Chicago looks particularly abysmal. The Windy City had the greatest population loss of any major metro area in the nation in 2016 for the second year in a row, losing nearly 20,000 residents. And for the third year in a row, Illinois lost more residents than any other state, over 37,000, according to the U.S. census.
Many of those Illinoisans are heading our way. The Land of Lincoln has lost 86,000 people on a net basis to the Badger State over the last decade, according to the Illinois Policy Institute. A study by University of Wisconsin-Madison economist Morris Davis shows a net migration to Wisconsin from Illinois of 7,657 between 2008 and 2012.
Comparing border counties is particularly illuminating.
Between 2014 and 2016, the BLS documented, Illinois counties bordering Wisconsin lost businesses, while nearby Wisconsin counties registered a gain. For instance, Lake County Illinois lost 1,043 private establishments on a net basis during that period, while just-across-the-border Kenosha County gained 202 establishments.
James Otterstein, economic development manager for Rock County in southern Wisconsin, says that in "any given calendar year, approximately 25 percent of the ... activity that flows through my office represents (Illinois) businesses that are evaluating their stay-and-grow vs. grow-and-relocate options."
He points to the many advantages of locating in Wisconsin, including lower worker compensation rates, lower unemployment insurance rates, lower utility rates, cheaper land and robust business development assistance.
Additionally, Wisconsin’s hourly minimum wage is $7.25, while Chicago’s is $11, with the rate set to increase to $13 — almost double Wisconsin’s rate —by 2019 (likewise for Cook County by 2020).
Last, but not least, Wisconsin is now a right-to-work state and bars unions in collective bargaining agreements from requiring workers to pay union fees. Illinois, whose legislature is in the thrall of labor unions, has no such law. It is no secret that businesses tend to favor locating where right-to-work rules apply.
Illinois pension disaster
One of the companies that moved across the border is Catalyst Exhibits, a leading maker of trade show exhibits. The company, which relocated from Crystal Lake, Ill., to Pleasant Prairie in 2011, recovered the expense of moving in just two years and has been booming since, with a workforce that has almost doubled in size, says CEO Tim Roberts.
Wisconsin is on a "different path" than Illinois, he says. The move was prompted by Illinois’ chronic inability to solve its pension crisis and the steep costs of doing business there compared to Wisconsin, he adds.
Kenall Manufacturing CEO Jim Hawkins concurs. His company, a leading manufacturer of advanced lighting systems, moved from Gurnee, Ill., to Kenosha in 2014 for a variety of reasons, including lower costs and concerns about Illinois’ pension problems.
Unfunded pensions may seem like an arcane issue, but consider that, despite having recently passed its first budget in two years — with a $5 billion tax hike — Illinois still has pension plans that are underfunded by $130 billion, according to that state’s Commission on Government Forecasting and Accountability. That reportedly equates to more than $10,000 for every Illinois resident.
To compound matters, Illinois has the worst credit rating of any state in the nation — one level above junk. And Moody’s has warned that a newly in-place budget still might not spare Illinois from junk status, with no game plan to reform its pension system. Chicago faces similar credit-rating challenges.
Since states cannot declare bankruptcy, Illinois’ choices are limited. James Paetsch, vice president and head of corporate relocation, expansion and attraction at the Milwaukee 7 economic development group (M-7), says Illinois will reach a day of reckoning, requiring punitive measures to rectify its yawning deficits. Businesses know that.
In contrast, Wisconsin has a fully funded pension fund, one of only two states that can make that claim, and a stellar credit rating.
Paetsch emphasizes that companies looking to set up in, or relocate to, a particular state want fiscal stability. Investing in a new plant or headquarters requires a long-term commitment, and executives making those decisions don’t want to worry about a state’s long-term fiscal condition. On that score, Wisconsin stomps Illinois.
How Wisconsin can kick a little harder
Illinois’ one big historical advantage — lower taxes —is starting to evaporate. Legislators there this summer increased the personal income tax rate from 3.75 percent to 4.95 percent and the business tax rate from 5.25 percent to 7 percent — spikes of over 30 percent that may be only the first of many. In addition, Illinois enacted an aggressive law in 2015 to collect sales tax from online retailers.
Although taxes in Wisconsin remain comparatively high, with a top personal income tax rate of 7.65 percent and a flat corporate income tax rate of 7.9 percent, there have been encouraging developments on that front. A new batch of tax credits in Wisconsin took effect in 2013 that virtually eliminates the tax burden onmanufacturers and agricultural operations. Those credits are responsible for a gain of over 42,000 total jobs here, according to University of Wisconsin-Madison economist Noah Williams.
That said, Wisconsin still faces challenges. For instance, more needs to be done to bring down state income and real property taxes. Even with tax credits and other incentives offered for certain prospective businesses, owners and executives might blanch upon seeing how their personal income would be eaten up by income and property taxes.
Moreover, as Tom Hefty, retired head of Blue Cross-Blue Shield of Wisconsin, points out, a recent survey of corporate executives shows that "highway accessibility" tops the list of corporate site-selection factors.
Wisconsin’s transportation fund faces a $1 billion shortfall, and the Legislature continues to kick the can down the road. The lack of a long-term funding solution threatens much-needed repairs to our highway system.
Finally, according to Kenall’s Hawkins, Wisconsin needs to plan for a possible shortage of skilled laborers, especially in light of Foxconn’s expected arrival.
The big picture
Nonetheless, Wisconsin Gov. Scott Walker and others have actively promoted the idea that the state is open for business — and many business leaders agree.
Catalyst’s Roberts notes that Walker and Lieutenant Gov. Rebecca Kleefisch personally reached out to him when he was weighing the move to Wisconsin. Walker also contacted Kerry Frank, CEO of Comply365, to pitch Wisconsin when she had to make a quick decision about moving her business, which makes software for mobile aviation devices. The presentation that local and state development leaders gave Frank left her "blown away" and led to her decision to relocate Comply365 from Roscoe, Ill., to Beloit in 2012.
As Kenall’s Hawkins puts it, Wisconsin has a "can do" attitude, while Illinois’ is more in the "can’t do" category.
These are not just incidental anecdotes. Chief Executive magazine named Wisconsin to its top 10 "2017 Best States for Business," up from No. 40 in 2010. Illinois’ ranking? Close to last at No. 48.
While many Illinois businesses and residents already have moved to Wisconsin, we may be only at the beginning of that trend — as many Illinois businesses likely don’t want to be around when the bill comes due for fixing that state’s pension mess and other fiscal problems.
Wisconsin is well-positioned to receive its fair share of those businesses —and to kick Illinois’ posterior for many years to come.
Jay Miller of Whitefish Bay is a tax attorney and an adjunct professor at the University of Wisconsin-Milwaukee’s Lubar School of Business.