Common wisdom would suggest that being a low-tax state would stimulate Illinois’ economic growth. However, in 2010 Illinois’ GDP grew only 1.9%. This rate is far below the 2.6% of both the National and Midwest average growth rates. If low tax burdens don’t attract industry than what does?

Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities in Washington D.C., has studied this question and has given us these surprising insights:

There is little correlation between low corporate and individual taxes and economic growth. Therefore, reducing public services in an attempt to stimulate economic growth is not cost effective.

The core drivers of economic growth are investments in human capital (education), physical infrastructure (public transportation, roads, bridges, etc.), and innovation.

A survey of entrepreneurs shows that the most important factors for them in choosing a site was first and foremost access to a pool of knowledgeable and talented employees, and secondly, proximity to customers and suppliers. Low taxes were way down the list. Entrepreneurs are attracted to vibrant cities with good parks and public transit; excellent elementary and university school systems; and an exciting cultural scene. They need these in order to attract and retain a skilled labor force.

It is start-up companies that are primarily responsible for job creation. Therefore, Illinois must encourage start-ups to open their doors here. Ninety percent of entrepreneurs who founded start-ups stayed in the state where they founded their business. The reasons had to do with family, availability of suppliers and customers, and the presence of a skilled and educated work force.

Entrepreneurs cannot be lured with corporate tax cuts. The reason being that start-ups begin as small businesses/S corporations and as such pay no state corporate income taxes (profits are passed through S corporations to their owners who pay a personal state income tax). The vast majority of corporations in Illinois are S corporations.

Taxes are not a major factor in the migration of people from one state to another! For example, between 2008 and 2012 many people with incomes in excess of $100,000 moved from Texas (a no-income tax state) to California (a high-income tax state).

The writer suspects that since Illinois is a low-tax state it does not have the resources to attract or retain businesses and jobs. He also suspects that emigration from Illinois has more to do with the lack of employment opportunities than it does with taxes.

Al Popowits

River Forest

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