By DAN ELSASS
Photograph courtesy Department of Business and Economic Devolopment 1978 MARKS the year that Illinois got terribly interested in the "Industrial Sweepstakes," the new high roller game sweeping the 50 states. The object of the game is for a state to provide enough juicy business incentives to entice the executives of a major corporation to locate their new multi-million dollar factory within the borders of that state. The business incentives can take the form of low interest loans, reduced state and local taxes, free highways to the factory or free manpower training. Illinois got suddenly interested in this sweepstakes for a variety of reasons. First, political and industrial leaders started taking a serious look at the real economic and revenue base of the state, which, despite an impressive agricultural element, is still industrial jobs. Nearly 1.5 million citizens of the state are employed in manufacturing concerns, and almost every study of the future growth of the state has shown the need to increase that base dramatically by the year 2000. Secondly, notwithstanding nearly 10 years of indifference bordering on hostility, it has now become more fashionable in Illinois to make concessions to industrial growth. The skepticism and the anti-corporate attitude of the 60's appears to have died even among the young. In its place has emerged the pragmatic view that business creates jobs, and full employment is the answer to a myriad of social ills including crime, drug addiction and expensive welfare payments. Another reason why industrial growth is suddenly so appealing is that it appears to be the easiest and quickest way to bolster a region's economy. Economists tell us that factory jobs create a ripple effect in their community. Each job in a primary plant creates an additional full job in a plant which supplies materials to the primary plant, and another three-fourth's of a job in a retail establishment (a bank, restaurant, etc.) which serves the employees of the primary plant. Yet although state officials and business leaders had known of such economic facts for years, they had made only marginal efforts to provide state incentives for such growth. What then made 1978 the year to get concerned? The simple truth is that Illinois was found to be falling far behind its competition in attracting and retaining industry. Contrary to popular belief, Illinois's primary competition for such industrial expansion is not from southern states in what is commonly called "The Sunbelt." David Pals, former industrial development manager for the Illinois Department of Business and Economic Development, states: "In reality we rarely compete with the Sunbelt states because most major U.S. companies that Illinois recruits need regional plants in all parts of the country, including the Midwest, for distribution purposes." Pals concludes that Illinois' real competition is those other "midwestern industrial states such as Ohio, Michigan and Wisconsin, who are all just as eager to retain their industrial base as is Illinois." Ford plant war It was probably the widely publicized "Ford Plant bidding war" of 1977 that showed the state's leaders just how few incentive cards they had in the bidding sweepstakes with their regional opponents (in this case Michigan and Ohio) After the first round of bidding, in which local officials including Chicago's Mayor Michael Bilandic and Gene Wheeler, manager of Springfield's Industrial Development Council, made local site and utilities concessions, things were still close. In Wheeler's own words, "We were relatively even." However, after the next round in which Ohio and Michigan laid out their state incentives,
DAN ELSASS
4/December 1978/Illinois Issues the Illinois hand was depleted and the state folded and went home. The plant ended up in Batavia, Ohio. Not surprisingly, industrial incentives became one of the major themes of the 1978 spring legislative session as the General Assembly and both gubernatorial candidates sought to provide the chips to permit Illinois to "ante-up" in this new bidding contest. Over 20 major pieces of legislation were introduced, each dealing with the subject of industrial incentives. House Republicans offered a seven-point "Job Stimulus Package," sponsored by House Minority Leader George Ryan (R., Kankakee). Democrats countered with a six-point program named after their gubernatorial candidate and called "The Bakalis Economic Revitalization Plan." By the end of July, three major incentive bills had passed both Houses and had been sent to the governor for his approval. Those bills were: H.B. 3167 (Madigan, D., Chicago-Redmond, D., Bensenville), a bill designed to bolster the bonding authority of the Illinois Industrial Authority, an independent state agency which makes low interest, start-up loans for new industry. Previously the agency had been handcuffed by language in its act restricing: 1) the dollar amount of its annual bond sales to $500,000 a year, 2) the interest it could pay on such bonds 6 per cent per year, far below the market rate, and 3) where it could loan its monies — only in counties where unemployment exceeds 6 per cent. H.B. 3167 would make the authority a valid the factor for industries unable to obtain conventional loans by permitting the authority to loan money statewide (with a maximum loan of $10 million per project) and to sell up to $100 million worth of bonds per year, paying interest at the going market rate. S.B. 736 (Egan, D., Chicago) would establish an exemption from the 5 per cent sales tax for all purchases of new machinery and equipment. This machinery and equipment would have to be used in manufacturing or assembling operations in existing, expanded or new manufacturing facilities. The bill as amended was tailored to the governor's request that this exemption be phased in over a six-year period. Manufacturers would receive a 31.25 per cent exemption the first two years with the exemption increasing an average of 17.5 per cent over the next four years until the exemption is 100 per cent in 1984. The cost to state and local governments in lost revenue would be $19 million in 1979 and $182 million in 1984. S.B. 1583 (Schaffer, R., Crystal Lake) was actually not a separate piece of legislation, but an amendment to the budget request of the Department of Business and Economic Development (BED) for a large increase in its advertising budget. Since this state department does the primary job of selling the State of Illinois to prospective industry in other states and in foreign countries, its advertising budget was increased this year from last year's figure of $47,500 to $144,000, over a 300 per cent increase. In addition, three other major business incentives received a great deal of attention and discussion, but were not passed by the General Assembly: H.B. 2738 (Ryan, R., Kankakee) would have provided free job training for any new or expanding industry through state grants to community colleges or vocational training centers in the vicinity of the proposed industrial growth. Each training program would be geared to the specific skills and machinery needed by the specific employer. H.B. 2552 (Shumpert, D., Chicago) would permit a parent corporation to establish a branch plant in an area of high unemployment (Model City areas). It would also permit these branch plants to be exempt from all state or local taxes for a period of up to 10 years. H.B. 2737 (Ryan) would permit county boards to waive their portion of local property taxes on new industry locating within the county for a period not to exceed 10 years and for an amount not to exceed $1 million. Illinois playing catch-up Even if all six of these business incentives had passed this spring's General Assembly, no politician would have been honestly able to guarantee his constituents that Illinois would attract a single new industry as a result. The reason is that while all these new incentives would have immediately placed the state in the forefront of innovative industrial recruitment if they had been enacted 10 years ago, things have changed drastically during that time. Today's situation finds many states with inducements that rival or surpass these.
For example, during the height of the Ford Plant bidding, Ohio's feisty governor, James Rhodes, personally went before the Ohio legislature to convince it to pass a total sales tax exemption on the purchase of all new machinery. He did this simply to keep up with Michigan which had approved a similar exemption the year before. Therefore, Illinois' recent sales tax exemption is certainly nothing new, and even its current six-year phase-in provision, will not permit it to reach full parity with Michigan and Ohio until 1984. While Illinois' Industrial Authority will now be able to loan up to $100 million in low interest start-up loans to new industries and up to $10 million to any one company, this will still leave the state well behind the State of Pennsylvania, whose bonding authority may loan out over $300 million per year and an unlimited dollar amount per project. Even more disturbing is the fact that despite the over 300 per cent increase in BED'S advertising budget, the department still spends less than 5 per cent of the annual $3 million spent by its counterpart in the State of Michigan to attract new industry. Another indicator of Illinois' disadvantage in this area is that the State of Ohio ran three full-page ads in the influential Wall Street Journal last winter informing business about the advantages of relocating within that state. The total cost of just those three ads was $120,000, or 90 per cent of Illinois' entire advertising budget. The same criticism can be leveled at the three other incentives which were considered, but not passed by the General Assembly. Wisconsin is one midwestern state that has already passed legislation providing for 100 per cent free job training to its new industries, December 1978/Illinois Issues/5 an incentive which Sunbelt states also provide for new arrivals. And, according to the Detroit Free Press, one of the major advantages for Ohio in its successful effort to secure the Ford transmission plant was the ability of the state's Claremont County to waive under Ohio law the county's property tax for a period of 20 years. In addition, both Ohio and Michigan have been experimenting with the concept of providing tax exemptions for factories locating in declining urban core areas. In 1976, Ohio passed the Impacted Cities Act which provides reduced property taxes for those factories; and this July, the Michigan General Assembly approved similar incentives for firms locating within the City of Detroit. Therefore, despite some rather impressive strides forward during the past legislative session, Illinois is merely beginning to engage in a competitive situation that is too important to ignore, but may be too expensive to play. Potential pitfalls Attracting a new industry to a state under the new rules of competitive state bidding can create as many problems as are solved by all those new jobs and new state revenues which would be generated by the new industry. As indicated previously, under the new Industrial Sweepstakes rules, just playing the game can become expensive. Under the old recruitment process, states sat back and let the industries come to them. Generally, if an industry liked the location, the transportation and a community in a given state, it moved there. Most of the direct negotiations were handled by the local community. However, in the mid-70's, the old recruitment process became obsolete. Perhaps it was a result of the recession and high unemployment, but companies started noticing that they could play one eager state against another and get higher concessions from all. According to Will Scott, vice president for Ford Motor Company of North America, this system of competitive bidding has existed between European countries for a number of years. "You'll be seeing a lot more of it in this country now that industry sees that it works," says Scott. Probably the first large-scale instance of this kind of bidding occurred in 1976 between Ohio and Pennsylvania with the grand prize being the first Volkswagen assembly plant to be established in this country. Pensylvania "won," but the cost to the state in inducements to the company was staggering. According to one report, "Pennsylvania's incentive package for Volkswagen included $100 million in loans and grants, $20 million in highway improvement, $10 million for a railway spur and a half million dollars in worker training funds." In the case of the 1977 Ford plant bidding, the final bids for the $500 million facility were even more spectacular. The Chicago Daily News estimated that between state and local government inducements, both the states of Ohio and Michigan were willing to forgive future taxes and make direct grants in excess of $84 million. These were direct revenue payouts by these governments and not partially loans as was the case in Pennsylvania. The final bid included $5.3 million paid by the State of Ohio to acquire and develop the building site, $5 million in highway improvements, $2 million a year in exemptions on state sales tax for new machinery purchased by the company and over $3 million in free job training for the plant's new employees. In addition, and as mentioned earlier, local units of government also forgave Ford $1 million on their local property taxes each year for the next 20 years. The Ford and Volkswagen cases indicate some of the problems that may lie ahead for states that go blindly into the "Industrial Sweepstakes." For while both Ohio and Pennsylvania felt that the millions in state incentives that they paid to attract these companies were wise long-run investments in state growth, they may well have been nothing but long-range gambles. First, in the case of the Ford plant, Ohio estimated that the 6,000 jobs created by the new plant would generate some $5 million in annual tax revenue to state and local governments. However, if the estimates of the incentives given to the plant to locate are correct, these units of government will be paying out almost $4.5 million of that revenue to the company, leaving a net gain of $500,000 for the first few years of the plant's operation. As the bidding war escalates between states — and there is presently nothing to indicate that it will recede — it is quite conceivable that state and local governments might find themselves actually paying more in inducements to the company than they are taking in in new revenue. What if during this short-term investment period, either the state or local unit of government (say a school district or county) found itself in a cashflow shortage caused by its commitments to new industry? Leap-frogging Another problem created by the states rapidly accelerating this bidding game, is that even as they are risking millions to develop highways, provide job training and encourage industries to buy new machinery, there are very few guarantees that these industries are even going to stay in a given locale long enough for the new revenue they generate to pay off the government investment.
Just as major league baseball players have recently found it quite lucrative to play out their one-year options and then jump to another team, industries might find that other states are willing and able to provide them better facilities, more roads or more tax-free years. Therefore, uncontrolled bidding by states could lead to a "leap-frogging" phenomenon where major U.S. companies have nothing to lose and everything to gain by moving from state to state. An even bigger concern to Illinois as it contemplates getting further involved in this frantic competition, is the effect that such a proliferation of incentives to new industry has upon existing industry in the state. States that buy land for out-of-state companies or provide low interest loans for industrial land acquisition may actually be harming their old industrial base. First, they are creating tremendous ill will among plants that have remained in the state for years. These companies' 6/December 1978/Illinois Issues
spokesmen complain, "Why should we stay in this state? They never offered to buy us property to expand or free roads to move our product." It may not be long before such indigenous companies are testing the waters in neighboring states. Secondly, these states that subsidize new industry are creating unfair competition for their domestic plants, just as if they were directly subsidizing these firms' competitors. If Illinois were to have attracted the Ford plant to Springfield and were to have provided it tens of millions of dollars worth of free land and tax exemptions, what the state would in effect be doing is reducing the cost to Ford of each car the company produced. This savings to the company could result in a savings of $10-20 per car produced at that plant. On the other hand, the Chrysler plant in Belvidere, Ill., which has been here for a number of years and employs just as many workers, would get no state incentives and its cars would cost just the same as Ford's to produce. What will a $10-20 reduction on Ford cars do to the market on comparable Chrysler automobiles? And further, how long could Chrysler compete with comparable Ford cars if it too did not start shopping around for inducements from other states? Direct competition? While it appears inevitable that Illinois must get more involved with industrial incentives of some sort, there are alternatives to direct participation in what is rapidly becoming a fratricidal and perhaps ultimately futile, second "War Between the States." We have already discussed how Illinois' attempt to provide typical business incentives will only put the state on an even footing with other midwestern neighbors and continue to escalate the bidding. However, what if Illinois were to emphasize and to develop attributes that only it could offer certain industries? For example, in 1976, the State of Massachusetts decided to bolster certain lagging industries by encouraging insurance companies to invest their premium assets in low interest loans to these industries. The reason Massachusetts picked the insurance industry was simple: the state is a leader in the number of national insurance companies domestically headquartered in the state. This means that all these insurance companies paid a 2 per cent domestic licensing tax in order to be headquartered in the state. Massachusetts told the insurance companies that it would forgive a certain percentage of this licensing tax for each $100,000 loaned to certain industries in the state. So far, the plan has generated nearly $27 million in low interest loans to these industries in the first year alone. Such a plan could also work in Illinois which happens to be the second leading state in the number of insurance companies headquartered within its borders. The 91 different companies that call Illinois home have, according to the Illinois Department of Insurance, annual premium assets of $13.7 billion. While Illinois does not presently have a domestic insurance tax similar to Massachusetts, it does have a 4 per cent corporate income tax which these companies must pay only in this state. If a viable exemption on the corporate tax could be devised for insurance companies that make low interest loans to Illinois industry, then these companies would be encouraged to make their considerable investments available to Illinois industries, thus making the state much more attractive to large industry. Another unique feature of Illinois' situation is its position as the leading exporting state in the nation, having done more than $9 billion in export sales in 1977. With this good reputation in the international market and the Port of Chicago's standing as an international port, Illinois recruiters might concentrate on firms that specialize in overseas trade. Illinois could encourage more of these firms to locate here by applying to the federal government to designate more of its river and lake ports as tariff-free international trade zones. This designation permits companies that receive raw goods from one country to process them duty free in this country and to ship the finished goods on to yet another country. Perhaps even more intelligently, Illinois should play down the outside recruiting and concentrate more on a strategy of building growth among the major companies presently located within its borders. As BED'S former manager Pals said earlier this year, "I'm more concerned about protecting what we've got from outside raids than I am about taking that 100-1 shot at getting the new industry." The same millions of dollars used to attract the Ford and Volkswagen plants could be used to keep existing residents happy. Perhaps these monies should be spent on tax incentives for rennovation of existing buildings, free job training for expansion of plants and the improvement of existing transportation routes. There is a growing recognition of Pals' contention on the part of state political leaders. During the last legislative session, attempts were made to amend legislation regarding sales tax exemptions for the purchase of machinery to include both new purchases and those for repairs of existing machinery. While these attempts failed, the discussion of industry retention did come to the forefront. The future In the Industrial Sweepstakes competition, Illinois is at the crossroads. State pride, battered and bruised by recent defeats, is pushing political leaders into the fray. On the other hand, existing economic interests and dwindling state revenues are serving to temper the lawmakers' zeal for the game. If Illinois should try to ignore the recent trends towards large-scale governmental planning to encourage industrial growth, it may well fall short of creating the some 320,000 new industrial jobs that the Illinois State Chamber of Commerce estimates will be needed by the year 2000 to maintain present economic growth. This figure is based on a 21.2 per cent growth factor. There are, however, encouraging signs which indicate that both governmental and private leaders are organizing to make rational decisions on the questions concerning what path this industrial growth should take. Already three study groups — Illinois 2000 (organized by the Chamber of Commerce), Illinois' Futures Task Force (established by the General Assembly) and the Illinois Department of Local Government Affairs' Housing and Urban Development Study — have proposed to make long-term recommendations regarding these types of questions. The end results of their deliberations may well effect the economic future of the state far into the 21st century. December 1978 / Illinois Issues/7
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