New Legislation Would Close Many Unjustifiable Tax Breaks
Provisions in State Rep. Jack Franks’ new bill that close numerous corporate loopholes are a positive first step toward supporting essential services for Illinois families and communities that today are threatened by the failure to replace lost revenues. The bill includes overdue reforms that end unjustifiable tax breaks for businesses, analysis by the Fiscal Policy Center at Voices for Illinois Children shows. These reforms include:
- Not rewarding businesses for investments they make outside Illinois. Illinois now gives tax breaks to businesses when they make certain investments anywhere in the U.S. Neighboring Wisconsin and Indiana are among 22 states to close this unjustifiable loophole. By closing this loophole, Illinois could raise as much as $100 million for vital services.
- Closing accounting loophole for corporations avoiding state taxes. Currently, most corporations must report income from both parent and subsidiaries in a single, combined tax return, which makes it harder to shift income to lower tax jurisdictions. But Illinois has a large loophole that exempts financial, transportation, and insurance corporations from this requirement. By closing this loophole, Illinois could raise about $25 million.
- Reducing the amount retailers receive for collecting Illinois sales tax. Illinois allows retailers to keep 1.75% of the sales tax they collect from consumers. This was intended to help offset what it costs businesses to calculate the sales tax they must remit to the state. But in today’s electronic age, this bears little relationship to the actual cost of collection. Frank’s bill would reduce the amount to 0.75%, about the same percentage Indiana collects. By reducing this “discount,” Illinois could raise well over $50 million.
- Curtailing the use of offshore tax havens. Frank’s bill includes provisions to restrict corporations’ ability to artificially shift profits offshore to known tax havens such as the Cayman Islands. By preventing the abuse of tax havens, Illinois could raise over $100 million.
- Treating corporate income from drilling in U.S. waters on the outer continental shelf as U.S. income. Currently, when companies gain income from drilling in U.S.-controlled waters, it is not treated as domestic income. By closing this loophole, Illinois could raise tens of millions of dollars.
- Tax hotel rooms booked online the same as rooms booked directly by a guest or through a travel agent. Illinois loses millions of dollars each year by allowing online travel companies (like Orbitz and Priceline) to pay less in lodging taxes on bookings than the hotels themselves must pay when the same room is booked directly with them or through a travel agent. By updating the hotel tax to reflect new methods for booking hotels, Illinois could raise about $9 million.
- End the special tax treatment for newspapers and magazines. News ink is exempt from Illinois’ sales tax. There’s no good reason for this exemption. By ending it, Illinois would prevent about $32 million in cuts. Governor Rauner has also called for closing this loophole.
- Phase out ineffective economic development programs. While Enterprise Zones promise jobs and reducing poverty in exchange for giving businesses a variety of tax breaks, they’ve been repeatedly shown to have little, if any, impact. By phasing out this program, Illinois could have over $100 million each year to invest in economic development tools known to work.
The state’s financial crisis stems from the 25% cut to income tax rates that went into effect in January. To stop cuts that are damaging families and communities across Illinois, lawmakers and Governor Rauner must raise the resources our state needs. As good a step as Rep. Frank’s bill is, much more is needed, including at least a partial restoration of the income tax cuts that went into effect in January.
To learn more about the revenue options lawmakers and Governor Rauner have to stop harmful cuts, read the Fiscal Policy Center’s report “Policymakers Can Choose to Avoid Cuts to Essential Services.”