September 30, 2013
The State of Illinois does not currently have a comprehensive policy on economic development incentives. Instead, the State offers a wide variety of financial incentives that reduce specific State or local tax burdens for businesses.
This creates an uncertain tax environment for Illinois companies and leaves the State vulnerable to pressure from businesses located here and to competition from other states trying to entice firms to leave Illinois. During the fall 2011 veto session, this problem came to bear when the CME Group and Sears Corporation threatened to move out of Illinois if lawmakers did not provide tax incentives to keep them in the State. In the end, Illinois approved a package of tax relief for the corporations and individuals that cost the State hundreds of millions in annual revenue, at the same time that it was struggling to cope with a massive backlog of unpaid bills and cuts to major government services.
Nearly two years later, Illinois has begun a process aimed at avoiding similar brinkmanship in the future and improving its assessment of existing tax incentives. Legislation approved at the end of the 2013 spring legislative session requires that the Illinois Department of Commerce and Economic Opportunity (DCEO) develop a strategic economic development plan by July 1, 2014, to be updated annually and fully reviewed every five years. The law also increases transparency requirements for businesses receiving State tax breaks.
House Bill 1544, which was approved by an overwhelming majority by the Senate and unanimously by the House of Representatives, was signed into law by Governor Pat Quinn on August 16, 2013. The legislation also establishes a new commission to help guide the creation of the State’s economic development plan and develop a marketing strategy to attract companies from other states.
The Illinois Business Development Council will have 12 appointed members serving 4-year terms. Directors of major State agencies involved with economic development, including DCEO, Labor, Employment Security, Revenue, Agriculture, Transportation and the Illinois Finance Authority, will serve as nonvoting members. The voting members will be appointed by the Governor with the approval of the Senate and are required to be from geographically and economically diverse areas of the State. The law specifies that at least two of the members be residents of areas where the unemployment rate is 120% or more of the State average. The members are unpaid, other than reimbursement for any expense incurred in order to serve on the Council, which is required to meet at a minimum of twice a year.
The new law also requires DCEO to collect additional information from any corporations receiving financial incentives from the State under most of the existing economic development programs but excluding recipients of funds from tax increment financing (TIF) agreements. Businesses receiving grants or tax incentives are now required on a quarterly and annual basis to report to DCEO the number of jobs created or retained as a result of the State funding. The reports must also specify whether the jobs are full-time, part-time or temporary. On an annual basis, companies also must provide details about wages paid and job classifications attributable to State incentives. The annual reports are required to include information regarding employees to be hired in the coming year, along with anticipated stating dates and average salaries for the positions being created.
The new reporting requirements apply to any business receiving State assistance through the following programs: the Economic Development for a Growing Economy Tax Credit Act; the River Edge Redevelopment Zone Act; the Illinois Enterprise Zone Act, including the High Impact Business program; the Rivers Edge Redevelopment Zone Act; Large Business Development Program; the Business Development Public Infrastructure Program; and the Industrial Training Program.
Some of the reporting requirements may be duplicative of the enterprise zone reforms passed in 2012, which added additional transparency and competition between cities to bid for the redevelopment districts.
In FY2012, the most recent year for which data are available, the State spent a total of $313.6 million on tax incentives for businesses. According to 2009 Illinois Department of Revenue data, only 0.7% of the more than 450,000 corporations filing taxes in Illinois take advantage of these tax incentives. As discussed in the Governor’s three-year projection, the various incentives approved in the fall of 2011 are expected to reduce State revenues by approximately $100 million annually.
Since 2011 the Civic Federation has recommended that the State develop a comprehensive economic development plan in accordance with the best practices established by the Government Finance Officers Association (GFOA).
The GFOA has developed recommendations on economic development planning for state and local governments and urges jurisdictions using economic development incentives to create a policy on the appropriate parameters for use of such incentives. According to the GFOA, at a minimum, an economic development policy should contain the following elements:
Goals and Objectives: Goals and measurable objectives create a context and accountability for the use of economic development incentives. Common goals used in economic development include: target economic sectors, business retention and/or recruitment, geographic focus, job creation, blight mitigation, improving economically distressed neighborhoods and environmental improvements.
Financial Incentive Tools and Limitations: An economic development policy should define the types of incentives and the extent to which the jurisdiction will use them. For example, governments may choose to grant an entitlement to any firm that meets minimum qualifications, or may choose to provide incentives based on an assessment of individual firms. Governments may also establish maximum funding for a particular program.
Evaluation Process: A clearly defined evaluation process should be outlined in an economic development policy for the purposes of consistency and transparency. Evaluation activities and factors typically include:
- How a proposal measures up to established economic development criteria;
- A cost/benefit analysis;
- An evaluation of tax base impact, both in terms of increases in taxable value and, where a TIF is proposed, the impact on all overlapping taxing jurisdictions;
- Analysis of the impact of a project on existing businesses;
- A determination of whether the project would have proceeded if the incentive is not provided; and
- A jurisdiction may also wish to include in its policy a list of required documentation for the economic development application and the officials who are a part of the review team.
Performance Standards: An economic development policy should require that specific performance standards be established for each project receiving incentives. Not only will these performance standards help a jurisdiction gauge the effectiveness of its overall economic development program, but may also be used to recover promised financial benefits, through clawbacks or linkage agreements, of recipients failing to fulfill their commitments.
Monitoring and Compliance: A process should be established for regular monitoring of the economic development incentives granted and the performance of each project receiving incentives. The policy should also provide for organizational placement and staffing of this activity. The monitoring process should examine performance standards relative to each economic development agreement and determine whether the goals for each project are achieved within the defined timeframe. Ongoing monitoring of these projects should become part of an overall economic development program.