The widespread (yet sometimes controversial) use of tax rebates for development in Illinois

It is common practice in Illinois for communities to give tax rebates to firms and companies to locate within their community. The primary reason: it ends up bringing in more sales tax revenue.

Communities throughout the region and the state share sales tax revenues to woo retailers — and they are within their rights to do so under Illinois law. In fact, rebate researcher Geoffrey Propheter found the rebate programs to be more heavily used in Illinois than elsewhere around the country.

For the most part, these programs have flown under the radar until this summer, when the Regional Transportation Authority, the city of Chicago and Cook County legally challenged a variation on their use. In lawsuits, they alleged Channahon and Kankakee used sales tax rebate agreements to divert sales tax collections unfairly from metro Chicago to small “sham offices” in their lower-tax towns — allegations denied by both communities.

With a spotlight now directed at sales-tax rebate programs, some observers are quick to say they stand behind the more common use of rebate programs to attract big-box stores and auto dealers…

But other observers say the programs can skew economic development efforts toward retail. This can be effective in filling city coffers but may not produce as much regional economic growth as office or manufacturing developments, which tend to have higher-paying jobs and an ability to sell products over a much wider geographic range.

The rebate programs also tend to foster bidding wars between towns, with taxpayers picking up the tab. Propheter, a research assistant at the George Washington Institute of Public Policy, found the rebate offers have been used in border skirmishes around the state, from Belleville, outside St. Louis, to southwest suburban Joliet.

This is not a new story: states and communities across the United States have been engaging in such battles for years. In most places, governments are looking out for themselves and have little incentive to participate in regional planning or cooperation. Particularly today, in an era when many municipalities are desperate to find some extra money, providing incentives for developments likely looks attractive.

It would be interesting to know why this has become such a popular tool in Illinois.

Critics of sprawl argue that this helps feed sprawl. Communities look for ways to bring in easy money and big box stores and strip malls are relatively cheap to build. It is also interesting to see what happens when sprawl moves past these communities and the big box stores become less attractive and the new ones are even further out from the city. Shopping malls and big box stores tend not to age well.

Several examples of this come to mind:

1. Some of the verbal back-and-forth between Illinois and several other states, including Wisconsin, Indiana, and New Jersey, over the increasing tax rate in Illinois and casino revenues.

2. The story of how the Fox Valley Mall came to be in Aurora. The story is that the developer played Aurora and Naperville off each other in order to get a better deal for developing land on either the east or west side of Illinois Route 59. Naperville was not as willing to negotiate – and things were looking relatively good for them with the relocation of Bell Labs and a Amoco research facility along I-88 in the 1960s – and the developer picked Aurora. Naperville knew that it had lost a significant source of revenue. To compensate, city leaders turned quickly to drawing up plans to revitalize their downtown, putting into action a plan that suggested building a park along the river (put together a few years later as the Riverwalk), grouping municipal buildings in the downtown (new City Hall, new downtown library), and beautifying some of the streets (see Jefferson Avenue and Jackson Avenue between Main Street and Washington Street). I wonder how the story would be told today in Naperville if their downtown hadn’t become a destination.

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