Democratic gubernatorial candidate Richard Phelan has been broadcasting a catchy statistic: 70 percent of Illinois corporations do not pay state income taxes.
But as is sometimes the case with campaign rhetoric, the assertion means less than it might appear.
Phelan, the Cook County Board president, and state Sen. Penny Severns of Decatur, his choice for lieutenant governor, use the impressive sounding figure in their campaign remarks.
“We believe that closing the corporate tax loophole that (allowed) 70 percent of Illinois corporations to escape paying a single dime in the last taxable year on record does not make sense, and we ought to close (it),” Severns said recently.
The idea may appeal to voters as a simple way to boost state funds for schools without requiring them to open their wallets.
But the facts are more complicated and suggest that, although the state might be able to raise corporate income collections somewhat, there’s little chance of a windfall.
“It’s one of those deals that sound better than it is,” said Mike Klemens, spokesman for the Illinois Department of Revenue. “It’s corporations, and corporations don’t vote. It’s the easiest thing to say.”
Phelan concedes that he isn’t sure what the statistic means and hasn’t provided details on how much extra revenue the state might generate from corporations. “I haven’t studied it,” Phelan said last week when asked to justify using the figure. “It’s a fact, apparently.”
The suggestion is one of three-including a bigger state cut of riverboat gambling revenues and “performance audits” to cut government waste-by Phelan to garner more money for schools, prisons and other needs. He has said he would consider these steps before he would support the kind of increase in income tax rates proposed by state Comptroller Dawn Clark Netsch, one of his rivals in the March 15 primary.
According to the Illinois Department of Revenue, 135,414 corporations filed state income tax returns in 1989, the latest year for which complete data are available. Of that number, 65 percent, or 87,699, owed no taxes.
Why? The main reason is that Illinois, like 40 of the 44 other states that levy corporate income taxes, bases those taxes on the net income reported on corporate federal tax returns. Nearly three-quarters of all U.S. corporations had no federal tax bills in 1989.
Of those Illinois corporations that did turn a profit for federal tax purposes, 65 percent paid Illinois taxes.
The remaining 35 percent didnot owe Illinois taxes because of state deductions and credits, which are often designed to encourage investment or employment. Corporations that operate in a number of states only pay taxes on the Illinois portion of their activities.
Dennis Gragert, issues director for Phelan’s campaign, said Illinois could broaden its tax by not allowing certain federal exemptions, eliminating some state deductions or levying a minimum corporate tax. He said it’s impossible to estimate the impact of any such changes because the Revenue Department doesn’t show which companies pay Illinois taxes.
Tax experts say many of the corporations that don’t have federal or state income tax bills are small. They may be mom-and-pop operations that pay out all their profits as salaries or firms organized under federal tax law so their income is passed on to shareholders and taxed at the individual level.
“The numbers and percentages appear significant, but the 70 percent that don’t pay income tax is a small percent of the economic activity in Illinois,” said J. Thomas Johnson, national director of state and local taxes at the accounting firm Grant Thornton and a former Revenue Department director.
“Unfortunately, if you talk in sound bites, people envision it’s Ford Motors that doesn’t pay taxes,” Johnson said.
In 1989, 132 Illinois corporations had state tax bills of at least $1 million and paid 45 percent of all corporate income taxes collected in the state, according to the Revenue Department. Nearly 85 percent of the state’s private employers, including firms not set up as corporations, have fewer than 20 workers, state figures show.
“If there’s a corporation earning income in this state, the largest ones pay income tax,” said Raymond Wagner Jr., director of the state Revenue Department.
The corporate income tax rate is 4.8 percent, compared with 3 percent on individual income. Under the state constitution, the corporate rate cannot exceed the individual rate by a ratio of more than 8-to-5. To replace a defunct personal property tax, corporations pay an additional income tax of 2.5 percent that is allocated to local governments.
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Including that replacement tax, 7.3 percent of Illinois tax collections last year came from corporate income taxes, according to the Tax Foundation, a nonprofit Washington research group. The average is 6.8 percent.
State Treasurer Patrick Quinn has recommended that publicly traded companies be required to report their state income tax payments and that the Revenue Department study the effect of Illinois’ corporate tax breaks.
Netsch rejected the idea of a minimum corporate income tax because of concerns about the impact on small companies, said her campaign spokesman, Pete Giangreco. About a dozen other states impose such minimum taxes, according to the Illinois Tax Foundation.
“We looked at an alternative minimum tax to deal with the problem and felt that, at this time, it wasn’t a good idea because of the negative signal it would send on economic development and job creation,” said Giangreco.
Under Netsch’s proposal, the income tax rate would rise to 4.25 percent for individuals and 6.8 percent for corporations, generating about $2.5 billion.
The proceeds would be used for school funding, personal income tax exemptions for low- and middle-class families and property tax relief.