Big Illinois companies seeking special state subsidies could trigger a broader debate over corporate tax policy in Illinois. Is that what they really want?
Archer Daniels Midland Co., Office Depot Inc. formerly OfficeMax Inc. and others have highlighted the fact that some of our largest corporations pay little or no state income tax. That\’s why they can\’t take advantage of the Economic Development for a Growing Economy tax credit program. The program gives companies a tax credit in exchange for investing and creating jobs in Illinois.
But a tax credit isn\’t worth much to a company that doesn\’t have any state income tax liability to begin with. So Illinois lawmakers have been cutting special deals for major companies like Sears Holdings Corp., Google Inc.\’s Motorola Mobility unit, Navistar International Corp. and others. Usually the deal comes after the company threatens to move its headquarters out of state.
Under these deals, the company gets to keep a portion of employee tax withholdings it would otherwise forward to the state. Effectively, the state is giving money to an entity that doesn\’t owe any taxes. It\’s kind of like an earned income tax credit for corporations, except these companies aren\’t near poverty.
The merits of these subsidies are the subject of much jawboning. But I\’m not going to get into that now.
I\’m more interested in the light these subsidy requests are shining on the negligible state tax liabilities of giant companies headquartered here. As a percentage of total income, some of our biggest companies carry a far lower state tax burden than many smaller businesses.
THE MULTINATIONAL EDGE
Pretty soon, people are going to start asking why. A big part of the answer lies in Illinois\’ decision many years ago to adopt a “single factor” corporate income tax system. It\’s complicated, but I\’ll summarize by saying the single factor system taxes companies only on the income they generate within the borders of Illinois. Previously, a range of factors determined corporate income tax liability.
Corporations with a big percentage of sales outside Illinois tend to make out better under single-factor taxation. Often they\’re global companies that do most of their business in other states or overseas. Smaller companies that do a larger share of business in Illinois frequently carry a relatively higher burden when taxes are based solely on in-state sales.
So it seems that the same companies requesting special deals to lighten their featherweight tax bills already had a built-in tax advantage. You can argue that Illinois had a rational purpose in adopting a single-factor system, i.e., keeping big companies with lots of jobs in the state. But you\’ll never convince a small company with a proportionally bigger tax bill than Boeing Co. that it\’s fair.
Disparities like that don\’t go down well during the best of times. But these are tough times for many small and medium-sized Illinois businesses battling a sluggish economy and the impact of the recent state corporate income tax hike. Amid those pressures, business owners who think big companies aren\’t paying a fair share of taxes might get angry enough to press for broader corporate tax reform.
Such a debate is likely to focus on ways to reduce basic tax rates and broaden the tax base. Somebody might even propose broadening the base by scrapping single-factor taxation. That\’s probably not a conversation our corporate giants want to have.