Indiana corporate leaders warned that the failure of the Republican-controlled Legislature to enact a law protecting gay, lesbian and bisexual people from discrimination could rebound on business, making it harder to recruit talented employees and sell the state as an attractive place to live.
Majority Republicans abandoned efforts to strengthen gay rights on Tuesday, saying a compromise proposal had satisfied neither gay rights advocates nor religious conservatives.
"We took a beating from all sides in trying to do this," Senate Republican leader David Long said. "This effort was unfortunately hampered by well-organized extreme messaging from groups representing both sides of this discussion - many of them from out of state. Neither of those sides were truly seeking a solution."
Indiana faced a backlash last year after it passed a law allowing those who oppose gay rights for religious reasons to withhold services such as providing flowers or cakes for same-sex weddings. The law prompted an uproar that included calls to boycott the state. It was later revised, although the Legislature wanted to revisit the issue this year.
The backlash may have contributed to the loss of a dozen conventions costing Indiana some $60 million, the tourism group Visit Indy said in a report last month. The decision on Tuesday was a new blow to business efforts to burnish the state's reputation, business leaders said.
"Indiana's economic competitiveness and the Hoosier brand have potentially been compromised again," said Indiana Competes, a coalition of several hundred state organizations and business including major manufacturer Cummins Inc., pharmaceuticals giant Eli Lilly and Co. and the NCAA governing body for college sports.
LGBT groups said it was too early to know if there would be another backlash, although they were not aware of any boycott efforts.
The group Freedom Indiana said it was disappointed by the setback.
"We've said from the outset that doing nothing was not an option," the group said in a statement. "Today, lawmakers did nothing to help protect LGBT people in our state, but our work is only just beginning."
Some evangelical Christians welcomed the demise of the legislation, saying it would have whittled away religious freedom. American Family Association of Indiana director Micah Clark said the bill was a "fatally flawed concept."
The intense debate came as Republican Gov. Mike Pence is struggling to recover from criticism of his leadership. His popularity dipped during the boycott last year, and he faces a tough election rematch in November with the Democrat he narrowly beat four years ago, John Gregg.
In a short statement Tuesday, Pence spokesman Kara Brooks said, "Governor Pence respects the outcome of the legislative process and appreciates the civility with which this issue was debated."
Gregg accused Pence of failing to provide leadership as the Legislature considered the issue.