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A Taxing Question PDF Print E-mail
News/Features - Feature Stories
Tuesday, 29 January 2002 18:00
Local business and political leaders fear that to gain a few thousandths of one percent of the state’s budget, Iowa Governor Tom Vilsack is threatening the economic balance of the Quad Cities. As part of his budget proposal two weeks ago, Vilsack announced a tax-policy change that could hamper efforts to attract businesses and workers to the Iowa Quad Cities. Although Vilsack expects a small windfall for the State of Iowa and plans to use that money to fund education, the real winners would likely be the Illinois Quad Cities.

Since 1973, Iowa and Illinois have had an agreement under which residents pay income tax in the state they live in, regardless of where they work. But Vilsack plans to end that agreement, meaning that people will pay income tax in the state in which they work. According to the governor’s budget plan for next fiscal year, the change would net Iowa $16 million a year to be used for education.

Several media outlets are reporting that the change would be a tax-preparation headache for many Quad Citians, but the repercussions could go far beyond people needing to fill out two tax returns. Specifically, business and legislative leaders in the Iowa Quad Cities fret that the change will make Illinois’ tax climate more attractive to new and existing businesses and their prospective employees. In the end, they claim, the short-term gains in income-tax revenue for Iowa will be more than offset by the loss of businesses and employees to Illinois.

Thom Hart, president of the Quad City Development Group, said it’s impossible to know the extent of the decision’s impact at this point. “It is speculative,” he said.

But he said he’s certain the change will have a negative impact on the Iowa Quad Cities. The main reason is that Iowa’s progressive income tax is generally higher than Illinois’ flat rate.

“There would be a significant penalty to work in Iowa if you live in Illinois,” Hart said. Illinois’ income tax rate is 3 percent, while Iowa’s highest rate is nearly 9 percent, which generally applies to people who make $75,000 or more a year.

That could mean thousands of dollars a year for top executives at local companies who live in Illinois but work in Iowa. And “the individual is the person who’s making the decision” about where a business locates, said Don Decker, a DavenportOne board member who works for Robert W. Baird & Company. Business leaders, he said, might choose to put their companies in Illinois to save their employees – and themselves – money on income taxes. “Why would I pay a dime more [in income taxes] if I didn’t have to?” he asked.

Hart said that decision-makers in business “vote with their feet” on taxation issues, moving their companies to locations with favorable tax climates. He added that school districts with higher property-tax rates frequently lose business.

A change in the Iowa and Illinois income-tax pictures will certainly affect businesses’ decisions about where to locate in the Quad Cities, he said “In our base package [that’s given to businesses], there’s a whole section on taxes,” he said. “It is one of the criteria.”

The income-tax issue could also give Illinois employers an advantage in attracting workers if they’re competing with companies on the Iowa side of the river.

Hart said the problem is that Vilsack is considering the issue as a quick budget fix and not in terms of business development for his state. The governor is “looking at this from an accounting perspective, not an economic perspective,” he said.

Right now, the income-tax question is one of where to live, because that determines which state’s tax rate you pay. But under Vilsack’s proposal, the issue shifts to one of where to work. That moves the burden of the decision from the individual employee to the business owner. “Now, I’m affecting them [my employees]” with a decision about where to have an office, Decker said.

There’s currently a nice equilibrium between Illinois and Iowa in terms of their tax climates. People who live in Iowa pay more in income taxes, but their property taxes are lower, while higher property taxes from living in Illinois are offset by the lower income-tax rate.

That balance would be upset under Vilsack’s proposal. If the reciprocal income-tax agreement is scrapped, more people might elect to live in Iowa for its lower property taxes and work in Illinois, where they’ll save money on income taxes. (Conversely, people who live in Illinois but work in Iowa would be doubly penalized, with a higher rate in both property and income taxes.)

The effects could include a boost to residential development in Davenport, Bettendorf, and other Iowa cities while they become less attractive to new and existing businesses.

Iowa state Senator Maggie Tinsman, a Republican, said the income-tax shift could threaten Davenport’s status as the engine that drives the Quad Cities economy. She said that Moline would likely become the new economic center of the metropolitan area. “I think it’s very, very short-sighted,” she said.

Decker said that the loss of a small plant with 50 employees to Illinois could wipe out Iowa’s gains in income-tax revenue. If workers and businesses abandon Iowa, the state loses not only income taxes but real-estate and sales taxes.

Tinsman said she’s already heard from at least one company – McGladrey & Pullen – with offices in both Iowa and Illinois that it would consider shutting down its Iowa office if Vilsack cuts the reciprocity agreement with Illinois. She added that she wouldn’t be surprised if Deere & Company closed its Davenport Works facility in favor of a plant on the other side of the river.

As unpopular as the move is with Quad Cities legislators, there’s nothing the General Assembly can do – practically speaking – to stop the Vilsack administration from severing the agreement.

“This is an executive-branch decision,” Tinsman said. “The only way it could be … waylaid is for people in the Quad Cities … to let the governor know that this isn’t the way to go.”

Joe Shannahan, a spokesperson for Vilsack, said the legislature could pass a bill requiring legislative approval for the change. But, he noted, Vilsack would have to sign the legislation before it could become law.

Decker wondered why Vilsack is willing to create such a furor for so little money, relatively speaking. “Why would you upset this apple cart … for a paltry $16 million?” he asked.

But Shannahan said the money is a significant amount, even in the context of a budget of more than $5 billion: “$16 million is not minor … when we’re trying to provide more money to education.”

Shannahan said the governor is willing to listen to alternative proposals to generate the additional $16 million in revenue.

“He’s looking for money wherever he can find it,” Tinsman said. “If you can find $16 million, he won’t do it.”

One possibility would be an agreement under which Illinois would pay Iowa a set fee each year in return for keeping the income-tax reciprocity agreement. (Wisconsin pays Illinois each year to maintain their reciprocity agreement, because of the number of people who work in the Chicago area but live in Wisconsin.) That would maintain the economic balance of the Quad Cities while providing the state with some of the money it needs.

But Illinois might not have any incentive to fork over a few million dollars to Iowa. After all, it looks like Illinois will get a big boost from business if Vilsack pulls the plug on the current agreement.
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