State Tax Policies Put Job Growth at Risk

Midwestern hospitality may not be dead, after all. Nearly eight months after state officials in Illinois raised personal income taxes by 67% and hiked corporate taxes by 45%, legislators are asking business leaders how to overhaul the tax code.

I hope the hearings prove fruitful.

The tax hikes, which the Illinois Policy Institute said could cost the state more than 200,000 jobs, prompted Fortune 500 stalwarts Sears Holding Corp. (Nasdaq: SHLD) and Caterpillar (NYSE: CAT) to threaten to move their headquarters elsewhere. They also helped Illinois earn the dubious distinction as Chief Executive magazine's third-worst place to do business, a drop of three spots from the year before.

Only New York and California, two states notorious for their high tax rates, placed worse.

It probably doesn't come as a shock that state and local governments live in a parallel reality. When the financial crisis hit nearly three years ago, businesses and private citizens took a rational approach. They weren't taking in as much money, so they cut back on spending. But many governments, because they have the ability to tax, chose a different route. Illinois, of course, was the poster child.

Before becoming CEO at True Partners, a leading tax planning firm for private and public corporations, I was CFO at a major packaged-foods manufacturer and managing partner at an international accounting firm. I can say unequivocally that companies don't like to move. Nor is it a common event. But as states with severe financial problems such as Illinois look to pass on some of the burden, businesses are going to reassess the places they call home.

Raising taxes will only make the decision easier. In addition, when deciding where to invest for growth, they will pick the lowest cost locales. And while it takes a lot for a company to decide to move its headquarters, it only takes a little to decide to locate a new factory somewhere else.

Geography is becoming less of a competitive advantage. Companies have long been attracted to Chicago because of its location in the center of the country, not to mention its fantastic airports and reasonable cost of living.

But Dallas and Atlanta have the same things going for them. (Irvine? Not so much. California has not been the economic miracle of the western world.) If politicians believe that businesses will remain in their jurisdictions simply out of tradition or history, then they're in for a rude awakening.

If you don't believe me, take a look at New York. According to a study by the Empire Center for New York State Policy, nearly 400,000 jobs left the state from 1993 to 2007. Meantime, job creation was anemic, growing at one-fifth of the national average. And the state is home to Manhattan, the economic center of the world.

I realize our states face enormous fiscal challenges, and they don't have many options to meet them. But I also know that tax hikes have unintended consequences. They may stave off a short-term crisis, but as time passes, they will inevitably do more harm as businesses and individuals move to places that will offer them more opportunities. After all, you can't take in more money if no one is around to cut you a check.