Caterpillar Rips Illinois' Business Climate, Despite Tax Breaks
First Published Thursday, 15th December 2011 03:35 am - © 2011 Dow Jones
--Illinois legislators approve R&D tax credits sought by Caterpillar.
--Caterpillar remains critical of Illinois' business climate.
--Company reiterates its earlier profit and revenue guidance; offers 2012 outlook.
(Updates with preliminary revenue outlook for 2012 in last paragraph.)
By Bob Tita
Of Dow Jones NEWSWIRES
CHICAGO -(Dow Jones)- Caterpillar Inc. (CAT) remains highly critical of Illinois' business climate, despite state lawmakers' approval of a series of business tax breaks this week that includes tax credits for research and development investments sought by Caterpillar.
A spokesman for the construction machinery manufacturer called the extension of the R&D credits a "small step in the right direction," after the state allowed the credit program to expire at the end of the 2010. But Caterpillar characterized the package of business tax breaks as largely a knee-jerk reaction to threats by companies to leave the state. Caterpillar said the legislation does little to improve a state fiscal condition that the Peoria, Ill., company considers unappealing for business investment.
"From a financial standpoint, Illinois is a patient in critical condition," said spokesman Jim Dugan. State government "continues to react in crisis mode, using Band-Aids rather than developing a long-term plan to get the state on the road to being healthy."
The business tax breaks are expected to cost the state $214 million a year by 2014, according to state estimates. Illinois is facing budget deficits and massive pension costs for state employees in the coming years that threaten to force legislators to consider additional increases in state income taxes.
Dugan said the state leaders have not created an atmosphere that "will encourage job creation, business growth and business investment." Caterpillar noted that the R&D tax credit program has lapsed three times in the past eight years as lawmakers swing back and forth between curtailing and expanding tax incentives for businesses.
A spokeswoman for Illinois Gov. Pat Quinn did not immediately offer a response to Caterpillar's complaints.
Caterpillar Chairman and Chief Executive Doug Oberhelman revealed earlier this year he thought about moving the company's headquarters out of Peoria when Illinois raised its corporate income tax rate to 7% from 4.8%. The state also raised the personal income tax rate to 5% from 3%. Oberhelman, who acknowledged receiving several offers to relocate from other states, urged Illinois legislators to consider rolling back the tax increase, which was passed to address a budget deficit.
The Illinois Senate on Tuesday overwhelmingly approved a set of tax reductions and incentives primarily aimed at keeping Chicago's derivatives exchanges, CME Group Inc. (CME) and CBOE Holdings Inc., and retailer Sears Holdings Corp. (SHLD) from moving to other states. The legislation also included tax deductions for real estate taxes and operating losses by businesses, as well as a five-year extension of tax credits for research and development expenses. The Illinois House approved the legislation on Monday.
Caterpillar made the extension of the R&D tax credits a focal point of its lobbying efforts in its home state this year. The program allowed companies to earn credits on their state income taxes based on spending increases on research and development. Caterpillar, the world's largest manufacturer of construction and mining machinery by sales, expects to spend more than $2 billion this year on research and development, with most of that money deployed in Illinois.
Caterpillar's high-profile criticism of Illinois's government suggests the company will likely bypass the state as the site for a new plant to produce mini-excavators and small bulldozers. Caterpillar plans to move assembly of the machines to North America from a plant in Japan. The plant is expected to employ as many as 1,000 workers. Illinois is one of about two-dozen states interested in hosting the $150 million project.
Caterpillar, the world's largest seller of construction and mining machinery, has largely avoided adding new plants in Illinois over the past 20 years, opting instead for overseas locations or sites in the U.S. South, particularly in Texas, North Carolina and Arkansas. Nevertheless, the company continues to employ about 23,000 people in Illinois, with major manufacturing sites in East Peoria, Decatur and Aurora. Illinois also remains the hub for the company's product engineering and research activities.
The company Wednesday affirmed its earlier 2011 revenue and profit estimates. Caterpillar said it expects total revenue this year to be $58 billion, including about $2 billion from its recent purchase of mining equipment manufacturer Bucyrus International. The company forecast a profit of about $6.75 per share. Analysts polled by Thomson Reuters expect the company to earn $6.79 a share on revenue of $58.4 billion.
The company's preliminary sales outlook for 2012 calls for slow, but improving growth in developed countries, like the U.S. The company sees total revenue expanding by 10% to 20% over 2011, implying a range of $63.8 billion to $69.6 billion. Bucyrus is expected to contribute about $5 billion in sales next year. Caterpillar's stock was recently trading down 4.5%, at $86.84 a share.
--By Bob Tita, Dow Jones Newswires; 312-750-4129; email@example.com