insight magazine

Tax Decoded | Winter 2015

Don’t Blame Big Business

Think closing corporate tax loopholes is the answer to our fiscal woes? Think again.
Keith Staats, JD Executive Director, Illinois Chamber Tax Institute

As I write this column, the state budget stalemate continues with no resolution in sight. It's really no surprise, though, since the only budget sent to the governor was out of balance by some $4B to $5B.

While the Governor approved certain education funding, the remainder of the budget was vetoed, and about 90 percent of state spending is occurring without a budget in place. The reason is a combination of continuing appropriations mandated by statute, and court ordered spending resulting from litigation.

The fact is there’s a mismatch between current state revenues and current expenditures. This mismatch is in large part caused by the rollback of the temporary income tax increase (January 1, 2015) and the fact that today’s spending is occurring at last year’s levels without considering tax rate decreases. This also accounts for the out-of-balance budget sent to the Governor, where spending cuts to meet anticipated revenues were not included.

Policy discussions about appropriate amounts of state spending are for another day and venue, but we can certainly look at the ledger numbers— and, more specifically, the tax numbers relating to statutorily mandated deductions, credits and exemptions.

We often hear calls to solve the state’s fiscal crisis by closing the tax “loopholes” businesses “exploit.” Of course, the definition of what constitutes a loophole depends on your point of view, but generally speaking, it refers to a tax deduction, exemption or credit granted to someone other than you.

Many people believe the state’s coffers would be flush with cash if the laws were changed to eliminate these so-called loopholes. But the fallacy here is evident when you review the numbers.

Every year the Illinois Comptroller issues the Tax Expenditure Report listing each tax deduction, exemption and credit, and the amount of taxes the state forgoes collecting as a result of the laws granting these exceptions from taxation. Exactly who benefits from the overwhelming majority of these loopholes, however, may surprise you.

The most recent Report pegs the total value of all tax deductions, credits and incentives granted to taxpayers (individuals, corporations, partnerships and trusts) in FY2014 at $9.2B. So, if the FY2016 budget is only out of whack by $4B or $5B, eliminating this deficit should be simple, right?

Wrong. When we dig into the numbers, the politically inconvenient fact is that the large dollar deductions, exemptions and credits are all granted to individuals—not businesses. The largest of the exemptions is the income tax deduction granted to individuals for federally taxed retirement and Social Security income, worth about $2.3B. Next is the state sales tax exemption for food, drugs and medical appliances at $1.7B. Then we have the standard income tax deduction worth $1.1B. Coming in fourth we have the property tax credit against individual income taxes at $552M. In total, these four tax loopholes account for $5.6B in tax breaks—and they’re all granted to individuals.

As for businesses, the largest is a $277M sales tax exemption for sales to exempt organizations (charities, schools and governmental bodies). The next largest is the sales tax exemption for farm chemicals used in production agriculture at $255M. Next is a $168M sales tax exemption for manufacturing machinery and equipment, and then we have a sales tax collections discount for retailers at $131M.

The Comptroller’s Tax Expenditure Report fully notes that 67 percent—or $6.127B—of the state’s tax deductions, credits and exemptions are granted to individuals, while businesses see maybe 20 percent of the total.

When the numbers are decoded, the simple solution of fixing the budget deficiency by eliminating perceived business loopholes is neither simple, nor a solution. The additional revenues wouldn’t come close to closing the state’s budget deficit. And, in fact, to close the gap by eliminating deductions, credits and exemptions you’d have to make significant cuts to those items granted to individuals. Whatever your stance is on that, one has to admit that it would be a very difficult thing politically for the members of the Illinois General Assembly to essentially increase taxes on individuals.

About Keith Staats:
Keith Staats is the Illinois Chamber Tax Institute's executive director at the Illinois Chamber of Commerce, and has been involved in tax planning, consulting and dispute resolution in all areas of state and local tax. He has served as General Counsel of the Illinois Department of Revenue (IDOR), was involved in the development of Illinois tax policy, reviewed and evaluated all tax-related legislation proposed by the Illinois General Assembly, contributed to the drafting of all tax legislation proposed by the Governor and was a member of the IDOR Informal Conference Board. He has represented taxpayers before both the Informal Conference Board and the Board of Appeals. Keith is a professional affiliate member of the Illinois CPA Society, and is a member of the Illinois State Bar Association and the Chicago Bar Association.

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