http://www.chicagotribune.com/news/watchdog/ct-illinois-corporate-tax-breaks-met-20151002-story.html
Illinois businesses get lucrative EDGE tax breaks, fall short of job goals
Jim Schultz, director of the Illinois Department of Commerce and Economic Opportunity, called dozens of the EDGE tax break deals "very distasteful."
(Nancy Stone / Chicago Tribune)
Michael J. Berens and Ray LongContact ReporterChicago Tribune
First full analysis of Illinois tax incentive program finds a billion-dollar giveaway rife with failure
Illinois' flagship job program has awarded millions of dollars to companies that never hired an additional employee.
It's doled out millions more in tax breaks for corporations that eliminated jobs and became smaller.
And it's allowed companies to reap lucrative rewards and then relocate to other states without penalty or repayment.
Illinois cut these deals through a strategy dubbed EDGE — short for Economic Development for a Growing Economy — that was launched in 1999 by Gov. George Ryan as a way to create jobs and lure businesses from other states.
But what began as a modest number of tax breaks for a handful of companies has mushroomed into a billion-dollar giveaway rife with failure.
In the first comprehensive analysis of 783 EDGE agreements, the Chicago Tribune found that two of every three businesses that completed the incentive program failed to maintain the number of employees they agreed to retain or hire.
State officials can't say how many jobs have been created through the job program; nor can they say how many jobs EDGE companies have eliminated. The Tribune, however, found that 79 current or former EDGE recipients have reported eliminating 23,369 jobs through layoffs and closures since entering the program.
Firms get millions in credits (charts)
Officials have long pitched tax breaks as a competitive tool that bolsters the state's fragile economy, and the program has seen explosive growth as Illinois battles with other states to attract and retain businesses. Leaders of the EDGE program say it has been a lifeline for dozens of companies, helping to create new jobs and improve workplaces.
But the Tribune's analysis suggests that tax credits often do little to help companies expand or create sustainable jobs. A pattern of deals emerges in which businesses lobbied for maximum rewards and minimum requirements — and the state said yes.
Recent headlines highlight examples where firms enrolled in the EDGE program are shedding employees: 1,000 jobs lost to the planned closure of Mitsubishi's plant in Normal, 500 layoffs at Motorola Mobility in Chicago, 700 layoffs at Kraft Foods in Northfield.
Incentives also carry a steep public cost. Every dollar awarded to a company is a dollar not collected to fund basic public services like education, transportation and health care.
Rauner offers tax breaks to lure ConAgra HQ to Chicago
Illinois has earmarked more than $1 billion for EDGE credits, and companies have collected about $450.3 million so far, state records show. In the 2014 fiscal year, Illinois diverted a record $101.7 million in tax revenue from public programs back to the bottom line of businesses.
Republican Gov. Bruce Rauner, who took office this year as a frequent critic of EDGE, has ordered the program to focus on creating jobs. But the Rauner administration expressed surprise at the Tribune's findings of widespread job losses and mounting costs.
Jim Schultz, director of the Department of Commerce and Economic Opportunity, which oversees EDGE, characterized dozens of the deals as "very distasteful."
Schultz said the Tribune's analysis also underscores how state law and policies have served to obscure public disclosure and accountability.
For instance, the state discloses the overall value of tax credits each company is eligible to claim but not how much a company actually received, saying tax records are confidential. State law requires an annual status report for each participant, but only for the first five years of the 10-year deals.
"It doesn't make sense to me. I'm a taxpayer. We're all taxpayers," Schultz said. "We ought to be disclosing this information."
The Tribune tracked the progress of each company by acquiring information from multiple state agencies, then created a database to document EDGE contracts and identify companies that had reported layoffs and closures. State records don't reflect whether those companies might later have rehired employees or added workers at other locations.
The Rauner administration says it is now approving EDGE deals only if they mandate the creation of jobs. The commerce department also has placed about 40 EDGE applications on hold pending resolution of the monthslong budget impasse.
The proposed incentives to help move ConAgra Foods Inc. to Chicago, announced Thursday, were in place before the June 2 freeze, Rauner aides said.
No matter what happens with the program, existing tax incentives will divert money from the state budget for at least a decade to come.
More money, but no more jobs
A little over four years ago, Gov. Pat Quinn joined the president of Mitsubishi Motors North America in unveiling details of a $29 million tax incentive package that would help keep the automaker's Normal plant from closing.
"Illinois is Mitsubishi country and always will be," said the Democratic governor. "We believe in that. We believe in this company."
His enthusiasm reinforced the marquee status of a company first brought to Illinois in the 1980s under Gov. Jim Thompson with a hefty package of state and local incentives as a joint venture with Mitsubishi and Chrysler Corp.
Thrusting his right thumb into the air, Quinn added: "I wanna say, on behalf of the people of Illinois: Long live Mitsubishi!"
The EDGE deal granted to Mitsubishi in 2011 didn't require the company to create new jobs. It just had to maintain its existing workforce of 1,200 employees.
At least 78 companies in the EDGE program were not required to increase the size of existing workforces by even one employee, contracts signed since 2004 show. And at least 51 of those deals were cut by the Quinn administration.
Last year, for instance, the Downers Grove division of Invesco, an investment firm, and its subsidiaries were offered a $717,000 tax credit for remaining the same size. The firm declined to comment.
State officials have defended retention-only deals as a way to support businesses during tough times. Every business in the EDGE program is required to invest in major workplace improvements, whether it's new machinery or improved factories, which can create a beneficial ripple across the broader economy.
David Vaught, a former Quinn budget chief and commerce director, said Quinn wanted to try "anything that could get us a job in a recession." Threats by companies to leave the state also were forcing the government to weigh the cost of tax breaks against lost revenues and jobs, officials said.
Quinn, in a statement Thursday, defended his policies, saying: "When you're in an economic emergency compounded by decades of financial recklessness, you fight to keep businesses and jobs in Illinois."
But the Quinn administration didn't just embrace no-hire agreements as a way to maintain existing workforces. It also permitted companies to fire a designated number of employees and still collect tax breaks.
Since EDGE began, a Tribune analysis shows, two dozen businesses collectively eliminated nearly 3,000 employees and remained eligible for tax breaks.
In one deal signed in 2011 under Quinn, Follett Corp. and divisions or subsidiaries in Oak Brook and Westmont were awarded $1.1 million in tax credits despite eliminating 122 jobs.
Follett, which provides educational products, began with 804 employees but reported a drop to 682 workers in a 2014 status report the company filed with the state. That was fine with Illinois officials because the state agreement required Follett to keep only 579 employees.
"Follett fulfilled its obligation under the program and applied the EDGE credits the company was eligible to receive," a company spokesman said in a statement.
The Rauner administration says it will no longer approve retention-only deals. Vaught called that decision "wrong-headed," saying such deals can defend against losing plants altogether.
Despite the tax incentives granted to Mitsubishi, however, the company announced this summer that it would close the Illinois plant.
In a speech to employees, a top Mitsubishi executive hailed their work over three decades. But the plant, which is capable of producing 220,000 vehicles a year, made only 60,000 in 2014 and is expected to make fewer this year, according to a company spokesman.
"It was a shock, an absolute shock," said Kyle Young, a vice president of United Auto Workers Local 2488 who has worked for Mitsubishi since 1989 on jobs ranging from driving a forklift to attaching mufflers.
Young, 55, lives with his wife in East Peoria. "I guess I could go to trade school," he said, pausing. "Or move out of state to another job."
Young now thinks of the celebration four years ago as a day of hollow promises.
"It was a dog and pony show," he said.
Adding over here, cutting over there
It's common for large companies to operate from multiple locations — corporate offices in one city, manufacturing divisions in another.
But under the EDGE program, every location or division or subsidiary of a company is treated as an independent operation — a distinction that business leaders lobbied to include in the 2003 Corporate Accountability for Tax Expenditures Act, state records show.
That seemingly inconsequential addendum has reaped millions of dollars in tax breaks for companies that downsized. If one part of the business eliminates jobs, another can still collect tax credits for retaining or creating jobs. It's happened dozens of times.
Abbott Laboratories, one of the Chicago area's largest employers, provides a stark example.
Abbott's sprawling North Chicago campus in Lake County is home base to drug and medical divisions in 130 countries. About 25 miles away, in Des Plaines, is Abbott's molecular diagnostic division, which joined the EDGE program in 2004.
The terms of the contract were simple. The Des Plaines division, which employed 260 workers, agreed to hire an additional 50 employees and invest $36 million into the workplace during the next 10 years. Since 2004, the company has hired at least 100 workers, according to the most recent state records available.
In exchange, the commerce department awarded about $14.5 million in tax breaks, though state records do not disclose whether Abbott claimed the credits.
Over in North Chicago, the Abbott headquarters in 2011 announced the layoffs of 1,000 employees statewide. Since then, Abbott's Illinois workforce has undergone numerous layoffs, state records show.
"The 2014 tax year marked the completion of the company's EDGE agreements," Abbott said in a statement. "Abbott has complied with all its EDGE program obligations, which were determined on a project-by-project basis."
Chicago-based Mondelez International Inc., best known as manufacturer of the Oreo cookie, is the most recent example of how companies have hedged tax breaks at taxpayer expense, the Tribune found.
Mondelez announced in July that about 600 workers would be laid off from its Chicago factory on South Kedzie Avenue. The production line has been moved to Salinas, Mexico, to save money, officials said.
But Mondelez operates a second manufacturing facility in Naperville that is licensed as a limited liability company, Mondelez Global — a common corporate maneuver for tax and liability purposes.
The Naperville facility received an EDGE contract in 2013 and agreed to invest $35 million in the facility and create 25 new jobs. The company has yet to achieve its hiring goals, a company spokeswoman said, but it has 10 years to qualify for the tax break.
The state thus could give tax breaks to one arm of a company for 25 jobs while the other arm has already cut 600 jobs.
Schultz, the state's commerce director, said he was unaware of such deals until he learned about them from the Tribune. He will honor the existing agreements but doesn't condone them, he said.
Democratic Rep. Jack Franks, a longtime EDGE critic from Marengo, called the incentive program "deeply flawed."
"We have no idea what we're getting in return in for our investment, and we don't even know if anything works," said Franks, who sponsored the 2003 corporate accountability law and last year co-chaired a House study of state tax policy.
Firms keep taxes for themselves
A fortunate few of the state's largest and most influential companies can pocket taxes paid by their workers thanks to "special" EDGE deals.
Instead of their taxes helping to fund public services, thousands of Illinois workers at these companies help subsidize their employers with money withheld from their paychecks.
These special EDGE agreements, designed with legislative backing to mend a state hit hard by the Great Recession, flourished under Quinn.
Private business leaders had complained that standard EDGE agreements were effective only if a corporation owed taxes at the end of the year. With deductions and depreciation, many big companies don't have tax liabilities.
The special EDGE program allowed companies, within limits, to retain employees' state income tax withholding payments.
Among the first firms approved for a special EDGE deal was Ford Motor Co., which said it is collecting more than $25 million in tax benefits for the last five years and could qualify for an additional $20 million over the next four years after upgrading plants in Chicago and Chicago Heights.
Ford officials said EDGE was among the factors that helped secure jobs at the Chicago-area plants, where it agreed to keep 2,600 workers but said the local payroll now approaches 5,500.
"Those (job) numbers are astonishing," said Jerry Stermer, another Quinn budget chief and senior adviser. "That is a prime example of why this is not an easy public policy to dismiss as boondoggle."
But incentives often represent a small percentage of a large company's budget — often less than 1 percent — and tracking a direct benefit can be difficult to measure. In some special EDGE deals, normal market forces like reduced sales revenue or corporate acquisitions mitigated or negated any positive impact.
In the last three tax years, Navistar International Corp. has collected $27.7 million, company officials said. But the value of the annual tax break has been dropping each year, a spokesman said, because of restructuring and hundreds of layoffs at the maker of heavy-duty trucks, school buses and diesel engines.
Chicago-based Motorola Mobility said it cashed in through EDGE for less than a year, from the fourth quarter of 2011 through the second quarter of 2012.
As company ownership shifted to Google, Motorola Mobility laid off about 1,400 workers and fell below the 2,500-head count required to qualify for incentives, the company said. Motorola now is owned by China-based Lenovo Group Ltd.
Sears Holdings Corp., which had threatened to flee Illinois, qualified for special EDGE status under a new law in December 2011 but has yet to collect. The company said it should begin receiving benefits soon because it now has met its job and investment benchmarks.
Looking ahead
While other states continue to embrace tax breaks — Nevada landed automaker Tesla last year with a $1 billion-plus tax incentive package, including breaks tied to job creation — Illinois plans to use them more sparingly.
"I don't think incentives are the way — ever — to try to get a business to come here," Schultz said, characterizing the strategy as a "race to the bottom."
Schultz said he hopes to use fewer tax breaks, and those that are awarded must create jobs. Illinois should sell itself, he said, by capitalizing on its central location; its roads, rail access, airports and waterways; its comparatively low utility rates, and a diverse employment pool.
Schultz maintained that businesses considering a move to Illinois don't consider tax breaks as important as issues like lower workman's compensation rates — a move pushed by Rauner and resisted by Democrats in the budget impasse.
Commerce officials had maintained late last month that it had approved only two EDGE agreements that weren't inherited from Quinn and that other pending agreements were frozen in June.
But the Rauner administration confirmed Thursday that Omaha-based ConAgra will receive EDGE tax incentives to move its corporate headquarters to Chicago and add 150 new jobs to the 643 the company has in Illinois now.
Still stalled in Springfield is the Rauner administration's wish to create a public-private partnership between the commerce department and a nonprofit group that would screen deals and help market Illinois.
Meanwhile, Schultz must continue to navigate the quirks of existing EDGE agreements.
For example, Mitsubishi has said it plans to stop producing its Outlander Sport at the Normal plant in November, less than five years into its EDGE agreement, which ends in January.
Businesses in EDGE must pay back tax credits if they close down during the first five years, a provision that has affected about a half-dozen companies since the program began.
But companies pay nothing back if they close after the fifth year. The Tribune identified at least 30 companies that benefited this way.
Mitsubishi won't comment on the matter, but company officials have reported to the state that a small crew will remain in the plant through May to fill production orders. If so, taxpayers are unlikely to recover anything.
Mitsubishi already has collected $5.2 million in tax breaks, the company said.
Twitter @MJBerens1
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