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The rest of the story behind Madigan’s corporate tax cut idea

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* The Illinois Policy Institute takes a closer look at the agenda outlined during Speaker Madigan’s inauguration address…

“Making sure all businesses pay something”: To start with the only idea that might have a sliver of growth connected to it, Madigan proposes cutting the corporate income tax rate in half. This idea taken alone is a positive start. The corporate income tax brought in $2.4 billion in fiscal year 2016. Cutting this tax in half would presumably reduce taxes by about $1.2 billion per year.

However, Madigan then goes on to say that many corporations do not have an income tax liability because they have no taxable income. This is true. Madigan suggests changing the corporate tax code to make sure “all businesses pay something.”

What that means is Madigan is proposing a new tax on corporations. This is a bad idea for a number of reasons. First, there already is a corporate tax all corporations pay – it’s the corporate franchise tax. All corporations also must pay the franchise tax, which is completely nonsensical and should be repealed.

A report from Ernst and Young shows that Illinois businesses pay more in sales taxes, property taxes, and unemployment insurance taxes than they do in corporate income taxes. Illinois businesses also pay more in workers’ compensation insurance than they do in corporate income taxes. It’s unclear how Madigan wants to levy additional taxes on businesses that have no taxable income, yet already pay taxes. This anti-growth idea would likely negate the pro-growth effect of cutting the corporate rate.

* More from Greg Hinz…

The problem with that is, historically, the bigger the business is, the more likely it is to have Illinois corporate income tax liability, the exact opposite of what Madigan suggested, said Carol Portman, president of the Taxpayers’ Federation of Illinois, a watchdog group.

While two-thirds of companies in Illinois and nationally don’t pay taxes in any given year, it’s mostly the smaller ones that don’t, Portman said. “It makes sense. Who’s not making money? It’s (often) the startups, the mom-and-pop companies.”

Yep.

Discuss.

posted by Rich Miller
Friday, Jan 13, 17 @ 12:04 pm

Comments

The problem is we have all these custom deductions for the large corperations, and large companies like walmart buy tax deductions from smaller business. companies like comcast amd the power companies try to use transfer pricing and losses in other states to reduce il tax etc. I would reduce the corp tax rate and get rid of the custom tax breaks that benefit only certain companies or industries. I would then add a tax credit per employee for salaries to full time employees who are provided health insurance and paid 40k a year or more

Comment by Ghost Friday, Jan 13, 17 @ 12:15 pm
The IPI is correct that pretty much every business pays something in the form of property taxes, sales and use taxes, excise taxes, etc., so the thought that we need to change the corporate income tax to require every company to pay something seems unnecessary if the goal is to make sure every company contributes.

If the goal is to make sure every company pays a proportional share relative to the benefits they receive from the Illinois economy, I think there are much better ideas.

Comment by Pelonski Friday, Jan 13, 17 @ 12:20 pm
Right so the battalion of tax attorneys and accountants that large corporations employ are doing a crappy job? Really? I don’t think so. I know that the two thirds is not small companies. It’s large down. Many large corporations have whole units devoted to tax avoidance and incentives. True small companies don’t pay a lot but they need the break not the large ones

Mainstreet not Wall Street

Comment by Honeybear Friday, Jan 13, 17 @ 12:26 pm
Aren’t corporations just passing through the payment of sales taxes?

Comment by Yossarian Friday, Jan 13, 17 @ 12:27 pm
It’s also because most big businesses choose not to apportion their income to Illinois (or the United States).

So first, big businesses keep their profits overseas in shell companies in the Cayman Islands. That’s how corporations have so much money overseas (that’s largely how Bernie Sanders proposed to pay for much of this agenda — tax that income). Total is more than two TRILLION dollars.

http://ctj.org/ctjreports/2016/03/fortune_500_companies_hold_a_record_24_trillion_offshore.php#.WHkcfGQrIy4

Then, on the relatively paltry sum of their income/profits that the big companies graciously allow to be taxable by American governments, they shift income around state by state to minimize how much state governments can tax.

In the 90s, we changed our law on how much of corporate income gets taxed in Illinois to favor the biggest companies at the expense of companies that are entirely in Illinois. It’s called the single sales factor. That cost us about $100M (probably more by now). Great move for the biggest multi-national companies; bad for the other corporations who operate and sell exclusively in state.

Comment by Dan Johnson Friday, Jan 13, 17 @ 12:34 pm
===Great move for the biggest multi-national companies===

Yep. Cat loved it.

===bad for the other corporations who operate and sell exclusively in state===

It didn’t increase their taxes, but it did mean we - yet again - narrowed the taxing base.

Comment by Rich Miller Friday, Jan 13, 17 @ 12:37 pm
It meant the burden of the corporate income tax fell heavier on the non-multi-national states. Yes, their rate did not increase, but they (we, I mean) paid a higher share of the total corporate income tax burden.

Eventually, we are all going to pay for this debt. Now we just pay for that with interest. When Cat pays less, we pay more (now or in the future).

Comment by Dan Johnson Friday, Jan 13, 17 @ 12:45 pm
(Typo: non-multi-national *corporations* in first sentence)

Comment by Dan Johnson Friday, Jan 13, 17 @ 12:46 pm
GRT! GRT! GRT!

Comment by OkComputer Friday, Jan 13, 17 @ 12:50 pm
–While two-thirds of companies in Illinois and nationally don’t pay taxes in any given year, it’s mostly the smaller ones that don’t, Portman said. “It makes sense. Who’s not making money? It’s (often) the startups, the mom-and-pop companies.”–

Wait a minute. Did Madigan say that if mom-and-pop take the income and file at the personal rate, the LLC would still have to pay something at the corporate rate?

I didn’t read the proposal that way at all. I took it at as a swipe at the Big Dogs that pay little or nothing,, or get a refund, due to income derived from out of state or because of tax credits.

I guess we’ll find out.

Comment by wordslinger Friday, Jan 13, 17 @ 12:56 pm
Yossarian,

They pass through sales taxes on the things they sell, but not the things they buy for use.

Comment by Pelonski Friday, Jan 13, 17 @ 12:59 pm
I’ve heard a lot of conservative pundits try to sell “lower tax rates but a broader tax base” for years now (an idea that I think has *some* merit, but I’ve never really dove into the data). Dunno if IPI ever opined on it before, but I’m not surprised that they’re ag’in it if MJM is f’r it.

Comment by Arsenal Friday, Jan 13, 17 @ 1:03 pm
Honeybear and Dan hit on a valid point. I personally know a Corporate Tax Attorney who charges $x,xxx per hour for counseling entities on minimizing their tax liability. If corporations weren’t playing that game, he couldn’t charge that much.

Comment by Logic not emotion Friday, Jan 13, 17 @ 1:04 pm
Retailers are obligated to collect sales tax from consumer, they merely act as a conduit. Taxpayers are liable for use tax(many exemptions avail for use tax too) but I’m sure the EY study considers the sales tax collected and remitted, which is not a tax burden on the retailer. Many producers and manufacturers don’t even collect sales tax if it’s a sale for resale. Funny, EY has a hard enough time properly reporting their clients state tax obligations as it is.

Comment by Headed to the exit Friday, Jan 13, 17 @ 1:12 pm
==It’s called the single sales factor….Great move for the biggest multi-national companies; bad for the other corporations who operate and sell exclusively in state.==

Yep. Worse yet, those multi-nationals would lobby for SSF in states where they have a large presence (HQ) then turn around and oppose it in states where their footprints were smaller.

Comment by City Zen Friday, Jan 13, 17 @ 1:16 pm
Most of the 2/3 that don’t OWE income tax don’t have a net income because the income is paid to the owner as salary which is taxed.

Comment by anon. Friday, Jan 13, 17 @ 2:12 pm
Not sure how single sales factor burdened in state domicile taxpayers v multistate? Prior to single factor(sales only) we had a three factor with property and payroll. If you were in IL, you wouldve apportioned more income because of wages and property in state. By going to sales only, we get more from the nonIL taxpayers who do not have property or payroll in state. Also, IL is a member of the MTC , which seeks to have states tax multistate taxpayers consistently to avoid double taxation. MTC approves of the single factor and many states have thus adopted.

Comment by Headed to the exit Friday, Jan 13, 17 @ 2:54 pm
Is a corporation’s Illinois income their federal income (like individuals)? If so, then most corporations should have little taxable income, giving the drop in federal corporate tax revenues in the last 60 years. Any corporate tax attorneys / CPAs in the house?

Comment by Anyone Remember Friday, Jan 13, 17 @ 3:13 pm
How about the sub chapter s corps that pay as an individual and not as a C corp and can have more non tax options if a C corp. Let us compare apples with apples and not just release data. Can we all have real facts to analyze please?

Comment by Bear3 Friday, Jan 13, 17 @ 4:12 pm