The 9 ‘corporate tax loopholes’ Pritzker wants to end that businesses call ‘incentives’

In order to balance next year’s state budget, Gov. J.B. Pritzker is asking legislators to eliminate what his administration calls nine “corporate tax loopholes” to generate nearly $1 billion per year in revenue.

However, some business leaders say the elimination of what they call “corporate tax incentives” would undercut the ability of many business owners to recover from financial hardships caused by the COVID-19 pandemic and could result in decreased state revenue in other areas.

Pritzker’s budget team targeted items they considered to be outdated or unfair. Some would change corporate tax policies the state enacted nearly 70 years ago, while others are a result of federal policy changes made during former President Donald Trump’s term.

“This will be one of the most challenging budgets this government has ever had to craft, but I know there are willing partners in the General Assembly,” Pritzker said. “Compromise, hard work and a willingness to make tough decisions is going to be required of all of us.”

Some critics argue those tough decisions are unfairly falling on the shoulders of business owners.

Eliminating any or all of the those corporate benefits could wreak havoc on any economic recovery plans, Illinois Chamber of Commerce CEO Todd Maisch said.

“They’re potentially devastating, and the use of the term ‘loophole’ is so intentionally misguiding, it’s a political travesty,” Maisch said. “The notion that it’s an unintentional exploitation is absolutely wrong. These are tax incentives to keep businesses competitive.”

Ralph Martire, executive director of the bipartisan Center for Tax and Budget Accountability, said the proposed changes all make sense if the other option is to raise taxes.

“They’re going to yell and scream, but if you look at really what the governor’s office put on the table, you quickly come to the realization that these are probably changes that should come off the books,” Martire said. “Everyone, including legislators, has tax fatigue, but you’ve still got to do something in a state that has been disinvesting in core services driven by structural deficits and bad tax policies for years.”

As currently proposed, the elimination or capping of the nine items is expected to generate $932 million per year, the governor said.

According to Deputy Gov. Dan Hynes and state budget director Alexis Sturm, the state would see $314 million more annually by capping corporate net operating loss tax deductions at $100,000. About 20% of Illinois businesses would be affected by this change, Sturm said. The change would sunset after three years.

Next, the state could generate $107 million annually by rolling back a Trump-era perk on deductions of foreign-sourced dividends. Multinational corporations currently receive more favorable treatment in deductions of their overseas subsidiaries’ shareholder profits than dividends generated domestically, budget officials said.

“This is an example of a loophole within a loophole,” Hynes said. “This is truly a corporate giveaway of the highest order.”

Another Trump-era policy Pritzker wants eliminated allows companies to claim 100% depreciation deductions on corporate assets in the year they are purchased. Sturm said the budget plan calls for legislation that would change the allowable deduction back to the standard depreciation schedule and generate $214 million annually.

The state could also receive $107 million more annually by accelerating the expiration of a biodiesel tax exemption, according to budget documents from the state.

The budget plan also calls on the legislature to reverse the repeal of the corporate franchise tax and reset tax credits for private school scholarships. And the proposal would eliminate a tax exemption on office furniture and other assets claimed by manufacturers that was intended solely for manufacturing machinery. Those changes combined would net the state an estimated $100 million.

A freeze on income tax credits for “construction job payroll expenditures” would generate an additional $16 million, according to state figures.

The final piece has the state capping a “retailer’s sales tax discount” at $1,000 a month to generate $73 million a year. Currently, retailers get to keep $1.75 for every $100 of sales taxes generated by purchases to offset the cost of collecting and accounting for those taxes.

“This is an old relic from an agreement reached in the 1950s to help implement the sales tax,” Hynes said. “But back then it was a lot more complicated process than it is today.”

The change would not affect 99% of retailers in the state, budget officials said.

But Maisch is unconvinced.

“Even if you’re a retailer that wouldn’t be impacted by this current proposal, every retailer knows that it’s only a matter of time before they’re on the menu,” he said.

All nine of the proposals require legislative support, but there’s already concern from both sides of the aisle.

State Rep. Fred Crespo, a Hoffman Estates Democrat, said he doubts the governor can get those changes made by the legislature.

“I am always concerned when there are assumptions built into those budgets that might or might not happen,” Crespo said. “In closing those corporate loopholes, I think he valued that at close to $1 billion. ... We’re not hearing that’s going to happen.”

State Rep. Mark Batinick, a Plainfield Republican, said the loss of these perks could stymie job creation.

“It’s not a real good time to be driving any business, big or small, out of Illinois,” he said. “They have a lot of options. A lot of other states have business climates that are a lot friendlier. We need more jobs and we need more people.”

Martire disagrees that tax perks offered to businesses stimulate the economy.

“There’s never been a statistical, meaningful correlation between changes in tax policy and job creation. Even at the federal level where taxation is more meaningful, researchers could find no correlation between increasing or decreasing tax liability and businesses creating or losing jobs,” he said. “As they are now, this is $932 million in tax expenditures to the state that are not doing the public any good.”

• Daily Herald staff writer JJ Bullock contributed to this report