Businesses say proposal is too taxing
State's plan to boost corporate rate could send companies packing, they warn

By Mary Ellen Podmolik, Tribune reporter, on January  8, 2011

Illinois businesses are lining up against a proposed increase in the state's corporate income tax, though only about one-third of Illinois companies pay those taxes annually.

At issue for corporations wasn't just the size of the increase, which could be as much as 75 percent based on Thursday's tentative agreement, but also that the proposal was short on details about how the state planned to rein in spending.

"It's a windfall for moving van companies," said Greg Baise, president of the Illinois Manufacturers Association.

On Thursday, Gov. Pat Quinn and top Democratic lawmakers in Springfield unveiled a tax package that would, for four years, raise the income tax rate that corporations pay to 8.4 percent from 4.8 percent. After four years, according to the proposal, the corporate income tax rate would be trimmed to 5.2 percent, more in line with what Illinois corporations originally expected.

"I was shocked," said Doug Whitley, president of the Illinois Chamber of Commerce. "It's counterproductive to what they've been saying since the election that creating jobs is a priority. It sends up another red flag that Illinois has an anti-business approach, which is exactly what we're trying to get away from."

In addition to the 4.8 percent income tax rate, corporations also pay a 2.5 percent tax on income, called the personal property replacement tax, which is collected by the state and flows to local governments because they can't assess personal property taxes. Raising the state corporate tax rate to 8.4 percent for four years would, in effect, raise corporate income taxes in Illinois to almost 11 percent.

The Tax Foundation, a nonpartisan, Washington-based research group, ranked Illinois in the middle of the pack, at No. 23, in terms of its business climate, based on its current tax structure. Friday, the group said if the proposed corporate tax increase, as well as a proposed 75 percent, four-year increase in personal income taxes, had been in place in July when it performed its study, Illinois would have ranked No. 35 in terms of its business-friendly environment, falling below states such as South Carolina, Pennsylvania, Alabama, Arizona and Tennessee.

Naperville-based Phoenix Closures Inc., a sixth-generation, 330-employee family-owned maker of plastic tops for containers, has manufacturing facilities in Newport, Tenn., and Davenport, Iowa.

"I think the actions speak for themselves," said company President Burt Miller. "If you're working for the economic development groups in Iowa, Indiana or Tennessee, you've got the easiest job in the world."

Phoenix, a profitable company that pays Illinois corporate income taxes, remains intent on keeping its Naperville facility competitive, but the proposed tax increase "is one more straw on the pile that we're trying to haul around, and it's not good," Miller said. "It means we'll have less revenue to reinvest in the business."

Illinois typically receives about $2 billion annually in corporate income taxes, compared with between $9 billion and $10 billion in personal income tax receipts. The difference is that while individuals are taxed on their income, whether or not they live within their means, corporations that lose money do not pay income taxes because of the statutory definition of profitability. In 2008, 36,473 of the 113,105 corporations that filed state income tax returns, or about 32 percent, owed state income taxes, according to the Illinois Department of Revenue.

Illinois companies only pay state income tax on the portion of their business that was generated in Illinois. Other company ownership structures, including partnerships, would not be affected by the increase in corporate income taxes but would see their personal tax liabilities increase 75 percent under the Democrats' proposal.

"You've got a state that's suffered for a decade," Whitley said. "You want to be nurturing. This is hardly a nurturing gesture."

With dozens of locations and 23,000 employees in Illinois, Caterpillar Inc. doesn't see a 75 percent corporate income tax increase as the medicine the state needs, noting that when its business plunged in late 2008, the Peoria-based company restructured.

"What, in fact, is being done to reduce spending?" asked Caterpillar spokesman Jim Dugan. "The serious belt-tightening has to be done first for the state's long-term health.

"This proposed tax rate, if it were to go through, would put Illinois at the top of the list in terms of effective tax rates. States compete aggressively to land facilities, and that is certainly one of the factors we consider."

mepodmolik@tribune.com

Tax Climate Index

If the tax plan announced on Thursday had been in place on July 1, Illinois would rank 12 spots lower in the 2011 State Business Tax Climate Index, according to the Tax Foundation.

 


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