Third Way Out of State Budget Impasse Emerges

Change in Corporate Income Tax Floated

There’s a potential third way out of the deadlock over how to close a $6 billion state budget gap.

Gov. Bruce Rauner is refusing to sign off on a budget without changes to collective bargaining and public employee unions. And the Democrats are refusing to go along with that. So, what are the alternatives?

Illinois Rep. Jack FranksIllinois Rep. Jack Franks

“Tax loopholes": it’s a nebulous phrase that often gets tossed around, but nobody really knows what it entails. Chicago Tonight has learned that a new bill will be filed, perhaps this week, by Democratic state Rep. Jack Franks. According to Franks’ estimates, that bill would close $3 billion in loopholes and will bring in new revenue without cuts or tax hikes.

Chicago Tonight has also been told that House Speaker Michael Madigan is heavily supporting this effort, hopes that it can garner bipartisan support, and has met with Franks multiple times to discuss the bill.

The devil is in the details: A big one would involve a change in the way the state collects income tax on corporations. In fact, it would be a reversion to the way the state used to collect the money up until 1996.

The corporate income tax is 5.25 percent, but not all of a company’s profits can be taxed because a lot happens outside the state of Illinois. To determine a fair percentage to tax, the state used a three-prong formula, basing it on in-state sales, plus whatever percentage of the payroll went to Illinois-based employees, plus the percentage of the property that was physically located in Illinois. In 1996, lawmakers under Gov. Jim Edgar simplified it and moved to a “single sales factor” approach, getting rid of the “property” and “payroll” factors, and only apportioned income tax based on profits on in-state sales.

That is costing the state $150-215 million a year in badly needed revenue, according to Franks. Some tax advocates agree that it is a regressive system that gives the state’s biggest corporations tax breaks.

“The problem with single sales factor is that it rewards large businesses and allows them to avert paying virtually anything in taxes, because these big companies predominantly have most of their services elsewhere in the world,” said Ralph Martire of the Center for Tax and Budget Accountability. “Meanwhile, mom and pop shops, who have most of their sales in Illinois, pay a higher tax. It was sold way back when as a way to stimulate the economy. Illinois and other states that use this approach have in fact not seen any bump in economic activity since the move.”

Illinois was one of the first states to adopt the “single sales factor” model. Now there are 15 other states including many in the Midwest that use it: 30 other states use a model similar to Illinois’ previous model and five states don’t collect corporate income tax, according to a 2012 report by the Institute on Taxation and Economic Policy

Laurence Msall of the Civic Federation says the state faces the threat of watching big corporations pack up for neighboring states if it reverts back to the old corporate income tax formula.

“There’s a real concern of whether you can go back to 15 years ago when Illinois adopted the single sales factor, because all the surrounding states have adopted it since, and it’s an economic challenge,” Msall said.

Suffice to say, Illinois business groups oppose the move.

“This would amount to a tax increase for companies that employee a lot of people in Illinois,” said Todd Maisch president and CEO of the Illinois Chamber of Commerce. “That’s absolutely backwards when other states have moved toward single sales factor.”

"Rather than push a tax increase the Department of Revenue estimates would negatively impact the Illinois' economy, House Democrats can save taxpayers over $2 billion by sustaining the governor's veto of SB 1229," said Catherine Kelly, a spokesperson for Gov. Rauner.

Franks also says he has a litany of other loopholes and tax breaks he wants to close that would add up to $2.9 billion. He’s proposing to end subsidies for ethanol production in Illinois and that could bring in $120 million. More efficient management of the Illinois lottery, he says, could net hundreds of millions, and he proposes an end to a $32 million tax break that newspapers receive on the purchase of ink.

Franks’ sponsorship of the legislation is notable because he is one of less than a handful of Democrats who don’t support the out-of-balance budget that the rest of their party members sent to Gov. Rauner. For this reason, Democrats can’t muster the votes to override the governor’s budget veto. It has led to a stalemate where each side’s terms are untenable to the other, and it's why this new approach is seen as a potential third way out of the impasse by the speaker and by the sponsor, who say they believe they can get bipartisan support.