State and local government arguably have a greater impact on business development and job creation than the federal government.  Two states recently took diametrically opposed approaches in trying to handle deficit concerns while still inspiring businesses and job creation.

It’s worth looking at these states’ actions.

Wisconsin
Under Governor Scott Wagner’s leadership, a number of measures favorable to small business have been put in place:

  1. The Governor pledged to reduce spending rather than raising taxes.
  2. A state-level deduction has been created for contributions to health savings accounts, a health care arrangement that’s attractive to many small businesses.
  3. The governor signed into law the Relocation Tax Credit, which effectively waives income and franchise taxes for two years on a business moving to Wisconsin. This applies to companies that have not conducted business in the state for the past two years.
  4. The governor is working on ways to reduce health care costs for small businesses. Recognizing that Obamacare would be more costly for small businesses, his administration is looking for ways to reduce costs. Toward this end, he signed a Tort Reform measure to cap punitive damages.

Illinois
This state recently raised significantly the tax rates on individuals and businesses. The individual rates see a 67% increase; the corporate rate rises by 30%. This makes Illinois the fourth-highest state corporate income tax in the country, and the fourth-highest combined national-local corporate income tax in the industrialized world.

According to the Tax Foundation, “the tax changes … have great potential for undermining Illinois’s ability to attract and cultivate business activity as the economy recovers.”

Lessons for all states
States facing budget crisis have some basic choices on how to handle the problem: cut spending, raise taxes, or do both. Those states that chose primarily to cut spending and not raise taxes seem to stand a greater chance of keeping and attracting business to the state; this will grow the economy over time and eventually boost tax revenues. Why is this concept so hard for some politicians to understand?