Corporate Income Tax

The Economic Development for a Growing Economy ("EDGE") Tax Credit program has released more than $1.6 billion in credits to companies promising to create or retain jobs in Illinois since its creation in 1999. But the evidence that tax incentive programs like EDGE produce real economic growth is limited, and EDGE credits in particular have been abused by companies simply moving jobs from one part of the state to another, as found by a 2015 Chicago Tribune investigation.

Now, a bill would reform and extend EDGE (under the name "THRIVE") with a twist that will only make the benefits of the program even more dubious: "transferability." Currently, companies cannot receive more in EDGE credits than their total state tax liability. But a "transferable" credit would allow companies to sell their excess credit to another company with a large enough tax liability to use it. That means that the state would end up directing resources to companies that had not even stated an intent to create or preserve jobs, reducing funds available for core services like education, health care, human services, and public safety.

CTBA's issue brief, The Pending FY2016 Fiscal Cliff details the significant—potentially over $12 billion— fiscal shortfall facing the next General Assembly and Governor-elect Bruce Rauner as they work to craft a General Fund budget for Fiscal Year 2016. The issue brief delineates the amount of recurring income tax revenue the state stands to lose when the temporary income tax increases under the Taxpayer Accountability and Budget Stabilization Act of 2011 phase down on January 1, 2015, as well as the worsening of other fiscal pressures that are projected to occur under current law.

Assuming no tax policy changes, if spending on services in FY2016 is held constant in nominal, non-inflation adjusted dollars at FY2015 levels, the state’s accumulated deficit in its General Fund will almost double, increasing from an estimated $6.8 billion in FY2015, to $12.7 billion by the end of FY2016.

This Issue Brief provides CTBA's analysis of gubernatorial candidate Bruce Rauner's position paper on fiscal policy, "Bring Back Blueprint: Jobs and Growth Agenda” (the “Blueprint”). The Blueprint represents candidate Rauner’s most complete policy statement on how to resolve the very real and serious fiscal problems that have plagued Illinois state government for decades. After taking into account all of the Blueprint’s proposals, the Illinois budget would be $5.9 billion short in FY2016, and that is before factoring in the current projected deficit from FY2015, which would increase the total accumulated deficit to $12.4 billion in FY2016. The Blueprint presents no data, plan, or policy proposal as to how to balance the budget.

Because the Illinois legislature failed to act during the spring 2014 legislative session, both of the temporary state income tax increases that became law under the Taxpayer Accountability and Budget Stabilization Act of 2011 (TABSA) will begin to phase down halfway through Fiscal Year (FY) 2015, which begins on July 1, 2014. Under TABSA, the personal income tax rate will decline from 5 percent to 3.75 percent, and the corporate income tax rate will drop from 7 percent to 5.25 percent beginning on January 1, 2015. This Fact Sheet provides an overview of the FY2015 General Fund budget passed by the General Assembly, and demonstrates that in this case there is a very high cost of doing nothing. 

Why, on March 26, 2014, did Governor Pat Quinn make the unusual move of introducing two different proposals for the fiscal year (FY) 2015 General Fund budget? The answer is simple. The Governor proposed two very different spending plans because the state faces two very different potential fiscal realities in FY2015. That is because both of the temporary state income tax increases that became law under the Taxpayer Accountability and Budget Stabilization Act of 2011 (TABSA)  are scheduled to begin phasing down this coming fiscal year. Under TABSA, the personal income tax rate will decline from 5 percent to 3.75 percent, and the corporate income tax rate will drop from 7 percent to 5.25 percent on January 1, 2015, halfway through the fiscal year. Collectively, those rate reductions will cause the state to realize a loss of $2 billion in revenue from FY2014 levels.  

Given Illinois’ already shaky fiscal condition, that loss of revenue will be impossible for the state’s General Fund to absorb without significantly reducing FY2015 spending on core services from FY2014 levels. Here is why: before losing the revenue from the phase down of the temporary tax increases, Illinois already has an accumulated deficit of $6.8 billion. That is roughly 27.8 percent of total FY2014 spending on the core services of education, healthcare, human services, and public safety, which collectively account for 90 percent of all FY2014 General Fund appropriations. Illinois has that significant accumulated deficit despite the new revenue generated by the temporary tax increases (personal and corporate) that passed under TABSA, and the $4.7 billion in service cuts made over the last five years.  So if the temporary tax increases are in fact allowed to phase out, the Governor will have no choice but to implement significant spending cuts.

That somber fiscal reality led the Governor to introduce two different spending proposals for FY2015. The first, which is the Governor’s “Recommended Budget,” is built on the assumption that rather than be allowed to phase down, the income tax rate increases passed under TABSA are either extended or made permanent. The second is a “Doomsday Budget” in which the Governor identifies the type of significant cuts—particularly funding for education and human services—that would have to be made if the temporary tax increases are allowed to phase down as currently provided in TABSA. 

Given the sluggish job growth during the recovery that has followed the Great Recession, decision makers both nationally and here in Illinois have indicated an interest in pursuing policy initiatives that will help spur the economy. Many have identified supporting small businesses and entrepreneurship as key to this effort. While various regulatory, spending and other policies (e.g. grants, technical assistance, incubators, and technology transfers) can directly and/or indirectly impact small businesses, the primary policy tools available fall into two distinct categories. On the one hand, policymakers can opt to reduce business and/or individual taxes in the hope that the tax relief will incentivize hiring and business expansion. Indeed, the Speaker of the House recently introduced a bill to reduce the state’s corporate income tax to stimulate job growth.

On the other hand, policymakers can make adequate investments in core public services and goods that businesses need to thrive, like education and infrastructure. Of the two primary policy tools available, the evidence overwhelmingly indicates that the latter approach is the best choice for supporting small businesses.

Knowing that the evidence shows business tax relief is not the best approach to stimulating the economy is one thing. What is crucial is that policymakers actually use this knowledge to craft effective, long-term solutions to one of the most challenging problems facing Illinois today—effectively stimulating the economy while dealing with the state’s fiscal shortcomings. After all, the state has an accumulated deficit of at least $7.6 billion in its General Fund budget for FY2014, the current fiscal year. This accumulated deficit is a very real problem that constrains the state’s ability to make the very investments in education and infrastructure that are so crucial to small businesses.

This Report highlights the best practices and policy initiatives decision makers could take to support small businesses in Illinois.  

A list of the corporate income tax rates in all 50 states and the District of Columbia in 2006.