Gov’s New tax fixes nothing...
But it will drive business out of Illinois

By Martin H. Singer

Are there politicians who can resist the urge to pander? Perhaps Mayor Daley showed the way when he took on Gov. Blagojevich’s ill-conceived gross receipts tax proposal.

The gross receipts tax, promises the governor, will solve everything. He will eliminate other taxes, provide universal health care and solve the problem of the under-funded public employee pension funds. From the same man who cut in half the funding necessary to reduce the state’s $55 billion pension deficit--$3800 for every citizen in Illinois—comes a tax plan that promise everything but will deliver nothing.

The governor proposes that all but a few protected businesses will pay a tax on gross receipts. In other words, a small, publicly held company that is struggling to bring out new technology will pay a tax on their sales, regardless of whether they have generated any profit. If a company designs, develops and delivers products but has them manufactured by another company within Illinois, the tax is levied twice: once on the manufacturing company and a second time on the company selling the product. And it goes on. The governor’s plan allows for the levy of taxes on six distinct stages in the business cycle. Companies conducting all of their operations within Illinois will contend with a pyramid of margin losses.

If you own or manage a business in Illinois, what actions would you take?

In 2002, PCTEL moved its operations from California to Illinois. In 2005, we moved two factories from Mexico to Bloomingdale because Illinois welcomed companies with a passion for technology and a commitment to growth. In 2001, there were no PCTEL employees in Illinois. Today, 220 of our 370 employees work in Illinois. The governor’s proposal could reverse those numbers in a hurry.

The gross receipts tax will pass unless legislators heed the warning of moderates such as Mayor Daley who warn that such a tax will drive businesses out of Illinois. When it passes, the governor will boast about his funding for new programs while not attending to the crushing debt of the public employee pension fund.

Businesses will relocate more of their manufacturing offshore and sell through distribution companies outside of the state. Next, they will relocate to warmer climates. As George Will has said, every year the demographic center of the U.S. moves another mile toward the Southwest. Blagojevich’s tax plan provides mass transit for the migration.

Illinois will slide further down the scale of innovation and competitiveness when compared to other states that have abandoned the gross receipts tax. A December 2006 study by the Tax Foundation demonstrated that the pyramid tax effect of the tax created a competitive disadvantage for in-state businesses, raised consumer prices and encouraged outsourcing. Michigan, Indiana, and West Virginia, whose GRTs have been repealed or will expire, learned their lesson the hard way: on the backs of their unemployed workers and in the halls of their cavernous factories.

Illinois should be a center of technology and economic development. We have outstanding educational institutions, technology institutes and what was once a stable platform of high-technology companies. The state’s reputation for innovation and competitiveness, however, has fallen.

We don’t have enough venture funding for Illinois-based companies, and our highly educated students flock to the coasts and the Southwest. In 2000, the state boasted 260,000 high-tech jobs. In 2004, we fell to 204,000. Technology employment rebounded slightly in the past two years, but those gains will evaporate with the governor’s scorched-earth approach to taxation.

The gross receipts tax discourages risk-taking and ignores the importance of attracting technology-based businesses to Illinois. It is politically expedient but financially—and ultimately socially—reckless. We will witness a new level of lobbying for special interest businesses seeking tax relief and the $55 billion in under-funded pension promises will balloon with the loss of jobs that generate tax revenue. Innovators and risk-takers will have great views of this debacle in their rear-view mirrors.

Martin H. Singer is chairman and CEO of PCTEL, Inc.; and chairman of the AeA Midwest Council.

This page was last updated on 03/27/07.  
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