The Rube Goldberg Approach To Taxation In Illlinois

Rube Goldberg was an American cartoonist, sculptor, author, engineer, and inventor who lived in the second half of the 1800s and well into the 1900s. While he apparently had many talents, he is most famous for his cartoons that depicted very complex machines and gadgets which he had invented that would take the simplest tasks and make them into a very, very complicated and convoluted  process. For example, his machines would take the simple task of making tea and turn into a multi-step process involving gears and belts and other mechanical operations.

The problem with Rube Goldberg type machines is twofold. First, much energy, thought, and resources are wasted coming up with complicated solutions to simple problems. Those resources could theoretically be better spent more productively on other tasks. Second, the more complicated and convoluted you make a process, the easier it is for things to go wrong and it is more difficult to anticipate what might go wrong.

Mr. Goldberg came to mind recently when I revisited the tax and budget fiasco that is the Illinois state government. Earlier this year we discussed how the state government's expenses were so much higher than its revenue that the solvency of the state government was in question. However, rather than attack the root cause of their problem, out of control government spending, the political class in Illinois decided to raise taxes to cover the revenue to expense shortfall without fixing the underlying problem.

Their tax increases were not insignificant. Personal income tax rates rose 66%, from 3% to 5%. My research indicates that they also raised the business income tax from 4.8% to 7%, with some companies also being subjected to a 2.5% tax surcharge. These tax changes changed Illinois' status from being the 21st most heavily taxed state to one of the top five most heavily taxed states.

Well, guess what happened? According to the the Associated Press and its writer, David Mercer, who wrote on May 20, 2011:

• In 2010, Illinois' state government agreed to give $272.7 million in tax breaks to 67 Illinois companies who threatened to leave the state and move their company's jobs elsewhere.
• That is more than four times what the state promised 44 companies in 2006 and more than double what it promised companies in 2009.
• Since the state government has already promised $230 million in tax breaks in 2011, the 2010 level of $272.2 million is likely to be reached and exceeded long before the year is out.
• Most of the incentive packages given to companies threatening to leave Illinois end up being strictly job retention programs, in most cases they rarely require the companies to increase employment as a cost of getting the incentives.
• In 2010, the state paid about $17,000 for EACH job retained in the state of Illinois, a number that should be much higher in 2011.

So let's review this Rube Goldberg approach to running a state government and its current tax policy. Rather than fixing the spending problem (the easy, common sense, simple solution), we raised taxes to cover the revenue/tax shortfall which caused companies to blackmail us if we do  not give them tax breaks to offset the higher tax rates we just passed which reduces the amount of revenue we have to cover the revenue shortfall, leaving us with the same existing problem that we spend too much as a government which just placed a heavier burden on the households and made it more unattractive for out of state companies to move in state since our tax rates are so high except for existing companies who we get blackmailed by. That about sums it up. Rube would be so proud.

Let's do a little math and figure out how crazy and unproductive this Rube Goldberg approach is. If it costs $17,000 to keep a job in Illinois, at an individual state income tax rate of 5%, each job would have to earn $340,000 in wages just to break even from a personal income tax perspective. Highly unlikely.

This is obviously a worst case but it does not get much better if you assume that half of the $17,000 tax break is picked up by corporate income taxes. In this what-if scenario, $8,500 or half of the $17,000 cost of retention, each retained job would have to earn $170,000 to cover the $8,500 cost via personal income taxes. No matter how you cut it, this Rube Goldberg approach to taxation makes no sense.

All of this nonsense happens because the Illinois political class either did not know how to fix the root causes of their problem or did not want to address the root causes. The state government spends too much. Any other solution creates unforeseen consequences that require additional actions that make a bad situation worse.

What should they have done in Illinois? According to experts quoted in the article, the following might have been a better approach:

• These kinds of programs, that just retain existing jobs without having conditions for job growth, are rarely successful
• The state needs a stable tax environment so that companies can plan around this stability.
• Beyond a stable tax environment, the state government needs to provide a modern infrastructure, good schools, and effective, basic government services so that companies want to stay in a state for more than cold cash. 

Good, simple, common sense approaches to employment. No crazy tax schemes where you raises taxes in January and almost immediately begin giving back some of the fruits of the tax increase to companies who just had their taxes raised.

One of the problem of dealing with blackmail type environments is that until you fix the core problems, the blackmailing never stops. Although the state government has already paid "incentives" to Motorola (3,000 jobs), Chrysler (2,300 jobs), Navistar (2,200 jobs), and U.S. Cellular (1,075 jobs), it is not over. Sears Holdings Corp., which has 6,200 employees in the state and is already getting incentive packages from the state government, is more than likely to look to sweeten its package when the current incentive arrangement expires.

Thus, $17,000 per retained job, quarter of a billion of dollars a year in incentives, and the core problem not fixed may look like the good old days before Sears is done. Just like a Rube Goldberg process, it never seems to end.




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