by Douglas L. Whitley
The Illinois corporate income tax has been under attack for some time by organized labor, social service agencies, community groups and even the director of the Illinois Department of Revenue. People and organizations who favor more government spending have seized upon the mantra that corporations don’t pay “their fair share.” The director of revenue has frequently sought to increase state revenues during his tenure by assailing business tax “loopholes” and has often fueled the fire by referencing the fact that two-thirds of corporate income tax filers have no Illinois corporate tax liability.
Over the last few years, the perception that has been perpetuated by proponents of greater taxation of business is that corporate income tax filers have no liability because of state-sanctioned tax exemptions, credits and deductions. For example, there has been a renewed focus upon the efficacy of the EDGE tax credit, a benefit for companies that increase employment in Illinois, even though only 56 of 113,000 companies claimed the credit in 2011.
One particularly troubling tactic pursued by community groups from Chicago has been to agitate for abandoning the most basic of taxpayer confidentiality rights in favor of a “transparency” requirement that corporate tax returns become public records available on the Internet. Legislation to mandate such disclosure has been filed in the Statehouse and in the Chicago city council. Clearly the objective of such messaging is to cement a false impression in the minds of the public that corporate taxpayers are villains who defraud and cheat the system in hopes that politicians will have little reservation about imposing a higher tax burden on faceless and non-voting corporations.
In fact, Illinois employers pay billions in total state and local taxes (property, sales, utility and unemployment taxes in particular) to finance government services. The Council on State Taxation’s most recent analysis of business taxes reported the total business tax burden in Illinois as $30.8 billion – the fifth largest overall business tax burden for all the states.
The corporate income tax is easy to criticize because it is by nature a complex tax. Most new business entities are small businesses that rarely organize as a corporation. The trend at both the national and state level is for business entities to be structured as “s” corps, partnerships or some form of limited liability company, rather than filing and paying taxes as a corporation. We have fewer corporate taxpayers every year – in the last 10 years there have been 8 percent fewer corporate tax filers.
Another assumption that should be put to rest is that the two-thirds of taxpayers who aren’t paying Illinois corporate income tax are all large multistate businesses. The exact opposite is true. The large multistate companies contributed 92 percent of the corporate income tax payments.
And, now in an atmosphere filled with negativity towards business taxpayers, we have a joint legislative committee in the House of Representatives deeply engaged in the pursuit of knowledge about Illinois tax laws. Hearings are being held, testimony is being received and another state budget is about to be conceived by policy makers who see only a revenue gap.
The Illinois Chamber and the Taxpayers’ Federation of Illinois have collaborated to prepare a groundbreaking report on Illinois corporate income tax filers: Probing Beneath the Surface: Understanding Why So Many Corporations Do Not Pay Illinois Corporate Income Tax. Our report answers the fundamental questions: Why do so few corporations have an Illinois corporate income tax liability? How significant is the impact of deductions and credits in eliminating tax liability?
Based on a series of Freedom of Information Act requests to the Department of Revenue for aggregated data off the corporate income tax returns, our study looks at the roughly two-thirds of Illinois corporate income tax filers that show no tax liability. The study covers tax years 2007 through 2011.
What we found
- Federal taxable income (FTI), which is the starting point for computing Illinois tax liability is by far the primary factor in determining whether an Illinois filer will have an Illinois corporate income tax liability – not Illinois deductions or credits. On average, of the 66.9 percent of corporate tax filers with no Illinois corporate tax liability, the most significant factor in determining whether a corporation would have an Illinois tax liability was whether or not a corporation showed federal taxable income (FTI) on line 1 of their Illinois return.
- In addition, Illinois corporate tax deductions play a very minor role in reducing a corporation’s tax liability to zero even if the corporation does have a positive FTI. The average number of returns filed showing no Illinois corporate income tax (Illinois CIT) liability over the five-year period was 75,517 (out of a total of 112,919 CIT returns filed). Of those 75,517 filers, on average only 4,049 corporations had a positive FTI on line 1 of their Illinois return but no CIT liability, but only 721 or 17.8 percent of the returns initially showing FTI wound up with no tax liability after applying Illinois deductions.
- More specifically, the 2011 suspension of the Net Operating Loss Deduction (NOLD) did not have a significant impact in moving corporations from a non-taxpaying status to a taxpaying status. Revenues generated by the suspension of the NOLD came primarily from taxpayers that were already paying corporate income tax.
- Illinois tax credits have almost no impact in explaining why businesses have no corporate income tax liability. Of the total 75,517 returns filed with no CIT liability, only 132 (0.2 percent) fall into the no liability category through the use of tax credits.
Consistent federal and multistate confirmation
We are not unique in Illinois. The number of Illinois filers with no tax liability directly tracks federal government statistics in terms of the number of federal corporate income tax filers with no tax liability, and since the vast majority of states piggyback the federal income tax code in some capacity, their income tax systems are similarly affected.
The federal Government Accountability Office (GAO), in a 2008 study of corporate filing patterns, found that nearly two-thirds of U.S. companies and 68 percent of foreign corporations do not pay federal income taxes. The data in the GAO report explains in large part why line 1 of the Illinois return is frequently a negative number. The top allowable deductions causing corporate taxpayers to reduce taxable income to zero or below were the deductions for: 1) salaries and wages, 2) interest expense and 3) depreciation of equipment purchases. The GAO pointed out that tax deductions were responsible for almost all of the two-thirds that did not pay federal income tax and that credits had a very minimal impact.
Many are anticipating that the U.S. Congress will eventually revisit the corporate tax code. Discussions are ongoing at the federal level about lowering tax rates and broadening the tax base. If that were to happen, then states would benefit from any base increases automatically – as they do now. For example, tax law changes associated with the introduction of the Affordable Care Act are expected to result in additions to the federal and state taxable income base.
We urge the Department of Revenue to make more aggregate information available to tax researchers so that tax policymakers have the data to make informed decisions as they consider Illinois tax reform proposals.
Douglas L. Whitley is president and CEO of the Illinois Chamber of Commerce.