Iowa, Illinois Economic Performance Diverging Sharply

Published August 1, 2005

The Mississippi River is not the only thing that separates Iowa from Illinois. So does Iowa’s economic performance.

New U.S. government statistics show the Iowa economy is surging at a pace that leads the nation. Neighboring Illinois, by contrast, has some of the weakest economic performance in the region.

Each state’s economic performance can be attributed in large part to fiscal policy. Iowa’s policy has been to restrain state spending and taxes, whereas Illinois has been sharply increasing government spending and tax rates.

Economic Differences Dramatic

Illinois has lost nearly 79,000 manufacturing jobs–10 percent of the total number of such jobs in the state–since November 2001, more than 31,500 of them since January 2003, according to the Illinois Coalition for Jobs, Growth, and Prosperity.

According to the coalition, if Illinois’ job growth had kept pace with national averages over the past decade, the state would have 475,000 more jobs today.

By contrast, “Manufacturing is still a significant component and one that is actually growing in Dubuque,” said Steward Sandstrom, president and chief operating officer of the Dubuque Area Chamber of Commerce. “John Deere has added jobs, several hundred of them. Eagle Window & Door recently finished an acquisition by Andersen Windows. That buyout will result in faster growth. They were on pace to add a couple of hundred jobs. Andersen is pushing them to add more than that. Right now they have about 1,000 employees. Four years ago they were at 500 employees.

“We have a number of companies that have seen substantial growth,” Sandstrom said. He also noted the service sector is expanding, citing as one example Prudential Financial, which is adding 100 employees to its Dubuque office.

Tax Policies Divergent

The two states’ fiscal policies have been vastly different in recent years. In the early days of the past recession (2001-02), Iowa Gov. Tom Vilsack (D) proposed tax increases totaling $200 million to $300 million in various budget messages, but the Iowa legislature rejected them. Instead, the legislature used a variety of reserve funds, budget reductions, and efficiency strategies to make ends meet.

While Iowa legislators have controlled spending and taxes, Illinois lawmakers have drastically increased both. From FY 2002 to FY 2005, the contrasts are startling:

  • Illinois raised state taxes by nearly $1.4 billion, while Iowa reduced taxes by a net $60 million (primarily due to a five-year plan to eliminate the state sales tax on utility bills).
  • On the spending side, according to the National Association of State Budget Officers, Illinois increased state spending by $5.6 billion (a 31 percent increase), while Iowa increased spending by $154 million (an increase of 3.3 percent).

Illinois Business Taxes Onerous

In February 2004, the Illinois State Chamber of Commerce and Chicagoland Chamber of Commerce released a study showing business fee and tax increases passed by the Illinois General Assembly to finance the FY 2004 budget would increase employers’ share of state and local taxes to 50.8 percent–almost 10 percent above the U.S. average of 42.6 percent and, in some cases, 25 percent above business taxes in other Midwestern states.

The state has done nothing since then to lighten those burdens.

As the Iowa economy has grown, state government revenues have risen. For most of the current fiscal year, Iowa’s state revenue growth has far exceeded original projections.

Consider the following key indicators of growth through the first six months of FY 2005. (The higher the percentage shown, the greater the evidence of economic growth.)

  • Individual Income Tax Collections: Iowa +7.4%, Illinois +2.9%
  • Corporate Income Tax Collections: Iowa +31.2%, Illinois: -8.2%
  • Sales Tax Collections: Iowa +4.9%, Illinois: +3.1%
  • Total State Revenue: Iowa: +7.2%, Illinois: +1.2%

The figures show Iowans are earning more money and purchasing more taxable goods, and Iowa corporations are earning more profits than their counterparts in Illinois.

“I think whenever you can leave the wealth in the wealth creators’ pockets, you’re going to do better,” Sandstrom said. “That is what Iowa has strived to do, and not easily. We have as many people here who like to tax and spend as any state. It has taken strong leadership to move forward with that kind of fiscal agenda.”

Jamie Van Fossen ([email protected]) is a Republican state representative from Davenport, Iowa and chairman of the Iowa House Ways and Means Committee.