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Fun with numbers (and history)

Tuesday, Jun 6, 2023 - Posted by Rich Miller

* Please pardon all transcription errors. From today’s first press conference

Q: On the broader question of the budget, do you have a response to Republican leaders who have expressed some displeasure with the level of input they had in the budget?

Gov. Pritzker: Well, look, I can tell you this. I had regular meetings with Republican leaders directly throughout the budget process. They would tell you that. And there were things that I specifically fought for putting in the budget that Republicans wanted in that budget. And just one example is, I’ve been working hard to try to lower taxes on businesses, particularly the ones that you don’t hear a lot about, they’re very annoying to small businesses. The corporate franchise tax, if you’ve not heard of that before, is one example of that. So I’ve been working to try to lower that tax. It’s not one of those things that gets a lot of attention anywhere. But I sat down with Republicans early on, that was one of a list of things that I thought we should work on together. And that got into the budget. It’s a big cut in the corporate franchise tax, $50 million is the cut. That helps businesses, gives them more resources to hire people, which everybody knows we need an awful lot more workers with the current labor market. So I’m pleased with what we got into the budget.

I was not happy that Republicans decided that, based on another set of issues, they didn’t want to vote for the budget. I realize that there are things in this budget that I didn’t like, but you know, in the end, you’ve got to look at the whole budget and say, is this overall good for the state, even if there are things that I would have changed if I could write it all myself? And the answer for me is, yeah, this is a good budget, we should pass this budget, I should sign this budget.

And then on the Republican side, they’ve often tried to pick one or two things to point out and say, well, that’s the reason I didn’t. But you know, I’ve had press conferences about investing in our youngest children, about investing in our universities. And guess what, Republicans show up at those press conferences, even though they may not have voted for the budget. I understand. They’re in favor of that funding, but eventually, you’ve got to vote for the funding in order for us to continue to provide funding. So I was disappointed.

But I’ll continue to continue to work have a good relationship with the Republican leaders, even when we sometimes disagree on things and so we’ll continue to try to get bipartisanship wherever we can.

The corporate franchise tax was supposed to be completely phased out by next year, per a 2019 agreement. But that phase-out agreement with Republicans was tossed out after the governor’s graduated income tax was defeated by business interests and the pandemic created fiscal uncertainty.

Also, in 2020, the franchise tax brought in $165.3 million. A $50 million cut is significant, but, remember, it was suppose to be gone by next year.

* The franchise tax is both onerous and unusual. From the Taxpayers Federation

There are only six states, then, that impose a tax roughly equivalent to Illinois’ franchise tax. Those remaining six (Louisiana, Massachusetts, North Carolina, South Carolina Tennessee, and Wyoming) base their taxes on a more traditional base—total assets or net worth as reported on an entity’s books and records or on its federal income tax return—rather than Illinois’ paid-in capital base. Illinois truly is an outlier. […]

A tax on net worth or capital stock results in pyramiding—a single investment may be taxed multiple times. It is not unusual for businesses to operate using multiple legal entities under a parent corporation. This can be for any number of reasons—regulatory requirements, accommodating new investors, or simply a legacy of business expansion. This very common structure frequently leads to a disproportionate tax liability. For example, assume two investors form Company A with $10,000. After a few years Company A expands into a slightly different business, so it forms a new subsidiary, Company B, investing $10,000. A few years later, Company B purchases 90% of the stock of a new venture in the same line of business—Company C—for $10,000. Each year thereafter, that original $10,000 investment is taxed under Illinois’ annual franchise tax 3 times because it is part of the paid-in capital of Companies A, B, and C.

A “good” tax is one that does not pick winners and losers based on artificial differences. The pyramiding problem described above is one way the franchise tax fails this test. Another occurs when debt is used, rather than equity. A corporation financed with debt, instead of owners’ investments, has lower paid in capital and thus lower franchise tax liability, resulting in two otherwise identical businesses paying very different amounts of tax. For example, if the owners of Corporation X take out $1,000,000 in personal loans and then invest the funds in the Corporation, its paid-in capital will be $1,000,000. Conversely, if the owners of Corporation Y invest $10 in the Corporation, but it borrows $1,000,000 (guaranteed by the owners), it will have the same $1,000,000 to operate its business as Corporation X, but face a much smaller franchise tax liability.

Anyway, your thoughts?

       

8 Comments
  1. - Former Accountant - Tuesday, Jun 6, 23 @ 12:01 pm:

    I use to have a small bookkeeping / accounting firm. I always had the clients structure their initial investments with low paid in capital with a liability to themself for the difference they invested. The only problem was having to explain to them why their balance sheet showed such low equity. But the bankers understand which is all that matters along with paying the minimum annual franchise tax.
    So I agree with the Taxpayer Federation reasoning on this issue.


  2. - Lucky Pierre - Tuesday, Jun 6, 23 @ 12:02 pm:

    JB wants credit for “working very hard” to try lower the unfair taxes that punish small businesses and are annoying that he raised in a fit of spite after agreeing to sunset them?


  3. - thechampaignlife - Tuesday, Jun 6, 23 @ 12:11 pm:

    It probably isn’t worth the effort, but running 2-3 partial BIMPs that appeal to different groups (progressives, moderates, and conservatives) could let them vote more granularly to support what they like and let the outcome fall where the votes lay. The challenge, of course, is that fewer things will pass if not tied to must-haves.


  4. - Grandson of Man - Tuesday, Jun 6, 23 @ 12:13 pm:

    There is a self-defeating loop: vote against state budgets and lose big in elections. Grumble and cry a lot about feeling left out, but don’t vote repeatedly to starve a state and against budgets. Now the ILGOP has such a solid reputation of fiscal wreckage.

    Dangerous grandstanding, pandering and virtue signaling is now a bipartisan thing. MTG voted to not default on debt and wreck the American economy, but not some Illinois House Democrats. Marjorie Taylor Freaking Greene is more sensible than them, lol.

    “It’s a big cut in the corporate franchise tax, $50 million is the cut.”

    This is good, and good enough to not deprive an entire state of funding.


  5. - Thomas Paine - Tuesday, Jun 6, 23 @ 12:35 pm:

    === It is not unusual for businesses to operate using multiple legal entities under a parent corporation. This can be for any number of reasons—regulatory requirements, accommodating new investors, or simply a legacy of business expansion. ===

    The Taxpayers Federation leaves out one of the biggest reasons corporations establish multiple corporate entities — tax avoidance.


  6. - Franklin - Tuesday, Jun 6, 23 @ 12:50 pm:

    So the Governor gave his word as part of a tax hike agreement and then reneged on his word when a second tax hike attempt failed and is now claiming a further codifying of his bad faith is somehow a sign of his good faith?


  7. - Oswego Willy - Tuesday, Jun 6, 23 @ 12:58 pm:

    - Franklin -, and to the post,

    Winners make policy.

    If breaking his word, or breaking agreements, or ending policy is bad, then beating Pritzker should be eady.

    See: Rauner, Bruce… re: Labor.

    Governors own.

    A signed budget is owned by any governor,

    Voting Red on a budget forfeits the opportunity to celebrate policies too

    If it was more important to vote against your pay increase than supporting a dozen things good to re-election, then choices made have ramifications.

    Winners make policy, budget votes funding votes, signatures matter

    Beat those who act in their station you don’t agree.


  8. - JB13 - Tuesday, Jun 6, 23 @ 1:18 pm:

    JBP channeling Lord Vader, eh?

    “I am altering the deal. Pray I don’t alter it further”


Sorry, comments for this post are now closed.


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