Illinois Tax Hikes Driving Business Investment Out Of State

Knowledgeable observers predicted early in this legislative session that a major hike in state taxes would drive business investment out of state, and developments in neighboring states are already proving them correct. For example, 112 commercial and industrial construction projects worth $8.9 billion are already underway in 2011 just across the lake in Michigan.

The electric power industry in Michigan leads the way with 37 projects totaling $5.2 billion, representing 58% of new industrial construction investment in Michigan for 2011. The largest single power industry project in Michigan is the 765 KV Lower Peninsula Transmission Line, a 700 mile overhead extra high voltage transmission line extending into Ohio. American Electric Power Company will commence construction of this project this summer.

General industrial manufacturing construction, including auto industry plant expansions, accounts for 20 projects worth $1.4 billion, followed by 21 pharmaceutical and biotechnology investments totaling $467 million.

Illinois could have benefited greatly from the jobs created by this construction investment, as well as the new jobs in the completed or expanded facilities. Our state economy desperately needs new high tech jobs, but the income tax increase enacted by our legislature and signed by our governor is driving the money, construction jobs and manufacturing jobs across the lake.

Jobs Bill, Maybe, Wall Street Transaction Tax, Maybe Not

House Speaker Nancy Pelosi scoffs at the idea floated last week by some of her Democratic colleagues that new job creation legislation could be funded by a tax on stock, bond and futures transactions on Wall Street financial markets, and Obama administration officials are equally cool to the idea, though some executive branch officials have spoken favorably in recent days about the desirability of “targeted” proposals for quick new laws to boost American employment. Oregon Congressman Peter DeFazio and New York Congressman Michael Arcuri are circulating a proposal for a financial transaction tax to raise $150 billion every year. Pelosi says such a new tax could drive Wall Street jobs overseas. Treasury Secretary Timothy Geithner echoes that such a tax would be “inappropriate” for the United States.

Vice President Biden’s chief economic adviser Jared Bernstein says, though, that the administration is looking for new ways to make sure the economic recovery is not a jobless one. Bernstein’s suggestions include direct public works programs such as hiring the jobless to board up vacant buildings, help with child care, and paint school buildings.

Meanwhile, at a hearing last Thursday before the House Oversight and Government Reform Committee, Congressmen continue attacking the claim on Recovery.gov that the $787 billion stimulus package has created 640,000 jobs so far. GAO reported at the hearing that the web site was replete with “a range of significant reporting and quality issues,” including 60,000 jobs reported as created without any dollars being spent, and 9,000 reports of money spent with no jobs created. House Oversight and Government Reform Chairman Edolphus Towns said after hearing the GAO testimony, “It is clear that errors found by GAO and others should be corrected immediately, not months later, no matter how difficult.”

Finally, economists are beginning to challenge President Obama’s campaign emphasis on green job creation as a solution to continuing economic growth. Georgia State’s Economic Forecasting Center Director Rajeev Dhawan says green jobs are “not the spark. This is not the solution to the current big unemployment problem.” His sentiments are seconded by Manhattan Institute economist Max Schulz: “For all the talk about green job creation, there’s an unavoidable problem with renewable energy technologies and the policies that promote them: From an economic standpoint, they’re big losers. Renewables can’t produce the large volumes of useful, reliable energy that our economy needs at attractive prices. Government subsidizes renewable because – all things being equal – the free market won’t.”

A recent survey by the Transportation Construction Coalition is also putting a damper on the pet political theory that additional funding for road and bridge projects will be a job saving legislative measure. Despite injecting $27 billion into such projects through the stimulus package, more than a million construction sector jobs have been lost in the past 12 months. Furthermore, this month’s Coalition survey indicates that 44% of road and transit contractors expect to lay off more permanent employees this year, even though they have received stimulus supported contracts.

Small And Family Business Tax Breaks In The Works

Politicians believe small businesses are the job engine of the US economy, and besides direct job creating measures, legislative leaders are also proposing work on a couple tax breaks for family owned and other small businesses before this session of Congress comes to a close. Despite Obama administration resistance to a permanent fix for the estate tax this session, House Ways and Means Chairman Charles Rangel is still pushing for permanent changes in the estate tax.

On the Senate side, Senators Thomas Carper and George Voinovich have introduced a bill to index the estate tax exemption to inflation. Their measure carries a cost of $23 billion in lost revenue to the federal government. A different measure supported by Congressmen Shelly Berkley and Senator Blanche Lincoln, would lower the estate tax rate to 35% and raise the exemption to $5 million, costing a revenue loss of $70 billion altogether.

Carper and Voinovich tout their proposal as a compromise measure. “For the sake of families and small businesses, we can’t let the estate tax go back into full effect,” Carper says, “and yet as long as we are running huge budget deficits we can’t afford full repeal, either.”

In an effort to give a break to some businesses which entered unwittingly into discredited tax shelter investments, the House Ways and Means leadership and the Senate Finance leadership are proposing a measure to relieve small businesses from fines grossly disproportionate to the tax benefits they purported to receive with the barred tax shelters. Some businesses have been fined as much as $300,000.00 for claiming an improper tax benefit of $15,000.00. House Ways and Means Oversight Subcommittee Chairman John Lewis spoke about such situations: “This is not fair. Small businesses should not be run out of business by tax shelter penalties aimed at big corporations.”

Last June the IRS stopped collecting the disproportionate penalties, to give Congress an opportunity to correct the situation. A bill introduced in both houses of Congress Monday would limit the penalty to 75% of the tax benefits improperly claimed.

Small Business Taxes To Skyrocket

Contractors beware! According to Monday's Washington Post, small businesses with profits in the range of $500,000.00 per year, and whose owners file income taxes as Subchapter S corporations - putting business profits on their individual tax returns - should expect to see a 19% increase in the income taxes they will pay on those earnings under the Obama administration's proposed $1.3 trillion increase in taxes on the "rich" over the next ten years. Ouch!

Tax Loss Carry Back To Be Tweaked

In an effort to make tax relief from the economic stimulus legislation available to more American companies, and further stimulate construction and manufacturing industries, Senate Finance Chairman Max Baucus and Senator Olympia Snowe introduced a bill just before the Easter recess began which will tweak the five year net operating loss carry back provisions of the stimulus package. The original legislation limited the five year carry back to businesses with less than $15 million gross receipts annually. The Baucus/Snowe bill will remove that threshold, and permit businesses of any size which have not received TARP bailouts to use the five year carry back to amend past returns and get immediate cash tax refunds to infuse working capital into the business if there have been business losses in the current downturn.

Small Business Tax Increases Bog Down Obama Budget

Senators and Congressmen from both parties who fall into the center of the political spectrum are raising concerns that the President's plans to pay for his middle class tax cuts by raising the two top tax brackets will unfairly burden small American businesses, which they say are the engine of economic and job growth in our economy. The concern is that businesses employing between 25 and 249 workers will have to cut jobs, hold off expansion plans or reduce wages and benefits for existing workers in order to pay the increased taxes. A lot of construction businesses would fall into this category.