SPRINGFIELD – Gov. Pat Quinn’s latest plan to pay off the state’s monstrous bill backlog is targeting income tax incentives that benefit Illinois corporations as a way to raise nearly half-a-billion dollars a year.
But a governor’s loophole is often a business executive’s job-creator. Business leaders call the plan a tax increase on corporations in a state they say is already woefully inattentive to the needs of employers.
As part of a $62.4 billion budget proposal laid out last week, Quinn proposed temporarily ending three tax breaks that would pump an estimated $454 million into the treasury. The money would go toward making a significant dent in $9 billion in overdue bills owed to providers of goods and services, the governor’s aides say.
Quinn told a joint session of the General Assembly that he plans to reduce the $9 billion deficit by 20 percent before the June 2014 end of the upcoming budget year. Assistant budget director Abdon Pallasch said the tax loophole money would be a savings on top of the $2 billion Quinn called for in reducing the overdue bills. That money Quinn plans to wring out of spending throughout the budget and growth in tax revenue.
“It is no time for corporate tax loopholes when the state of Illinois has bills to pay,” spokeswoman Brooke Anderson said. “Suspending these loopholes until the backlog is paid down will ensure vendors are paid faster, which is good for the economy and the budget.”
But the economy and budget also get a boost when employers are hiring taxpayers and making money, said Todd Maisch, vice president for government affairs for the Illinois Chamber of Commerce.
The elimination of tax loopholes “is just one more way in which Illinois is the leader of the pack of doing things that employers will shake their heads and say, ‘When are these guys going to figure it out, that you’ve got to help us and not continually have an agenda that whacks us on the head?’ ” Maisch said.
It’s a philosophy that Quinn has espoused previously. Just over a year ago, he signed legislation providing $100 million in incentives to prevent Sears and the corporation that runs the Chicago Mercantile Exchange and the Chicago Board of Trade from leaving the state.
On Sunday, he told The Associated Press that those breaks were different because they saved thousands of jobs. But suspending tax breaks now is “the way to go,” he said.
How temporary the proposed tax-break suspension would be also is a question, given the enormity of the state’s financial problem.
Incentives can be a blessing or a curse, said Josh Goodman, a senior associate focusing on state tax incentives for the Pew Charitable Trusts. He said it’s crucial for states to conduct a “rigorous analysis” of their economic-development tax breaks to see if they’re doing what they’re supposed to.
The biggest chunk of money from Quinn’s plan – $320 million – would come from an Illinois tax on foreign profits paid as dividends to U.S. parent companies of multinational corporations. But it would also tax dividends paid by U.S. subsidiaries of companies doing business in Illinois and business leaders say it would be a penalty because the companion companies would pay tax on profits twice.
In 1992, the U.S. Supreme Court invalidated taxing foreign dividends by ruling that Iowa was not taxing domestic dividends the same way. But Quinn’s plan would put a tax on domestic dividends, too – even from subsidiaries within Illinois. Maisch said that is even worse, because an Illinois subsidiary would pay tax on its profits, then pay tax again when it turns over some of that profit in dividends to the parent company.
In a second measure, Quinn would raise $100 million by eliminating a link between the state tax code and a federal law that allows tax deductions for “production activities” that Illinois-based companies move to other states. The business community argues the law encourages job creation in the U.S.; Quinn administration officials ask why Illinois tax revenue should suffer for production that occurs elsewhere.
The third proposal would require companies that have companion businesses to file a combined tax return, even if the companion is in the finance, insurance, or transportation fields, which are currently fall under the “non-combination” rule. Quinn argues that rule allows sophisticated companies to avoid taxes. Such companies include General Motors Co. and financing arm GMAC; or printer R.R. Donnelley and its affiliated third-party logistics services for warehousing and transportation
“The governor’s plan would suspend these unnecessary loopholes until the bills are paid down,” Anderson said. “This is a commonsense proposal that would be good for the economy and help return Illinois to sound financial footing.”
Goodman, of the Pew Charitable Trusts, said a study of tax programs in Connecticut found that some were bringing in revenue and jobs even after accounting for such factors as whether lost state revenue would have done as much if spent by the state on employees or programs, or whether a company using a tax break and creating a job wouldn’t have hired someone anyway. Other times, states have found the programs aren’t doing what they were supposed to, Goodman said.
“Incentives are often part of this competition between states for jobs and investment,” Goodman said. “But on the other hand, incentives come with a cost and a lot of states, including Illinois, are still dealing with significant budget problems, so that’s why it’s so important for states to really do rigorous analysis to make sure the dollars they commit to incentives are dollars well spent.”