The Small Business Advocacy Council (SBAC; I’m a member & board member) has been examining Illinois’ convoluted & corrupted tax system (commercial, consumer, etc.). One of our members, Steve Banke, CEO of 3Points, an IT service provider, did an amazing analysis of Illinois’ tax system & points out the following:
1. In January 2011, the State of Illinois raised the corporate tax rate 45%, from 4.8% to 7%. This increase of 2.2% could wipe out the profits of many small businesses that operate on tight margins, especially during a recession like this one. Why can’t Illinois government do less spending instead of raising taxes?
2. These tax increases forced the Washington-based “Tax Foundation” to move Illinois from the 23rd worst tax environment for business in the country to 36th worst for business.
3. Indiana, a state that many of us could move to easily ranks 10th & is reported to have a $1.2 billion tax surplus this year. What are they doing that we are not? Should we threaten to move there?
4. HB 3659, the Main Street Fairness Act was signed in Feb 2011. This act requires merchants who sell online using local Illinois distributors, but who do not have physical presence in Illinois, to collect & remit sales tax. Today the tax is owed, but it’s the Illinois resident that is liable if the merchant does not collect & remit the tax. It supposedly would increase revenues by hundreds of millions of dollars say advocates. Others say it will only drive the local distribution across state lines, hurting local businesses. The question would be, what other situations like this exist?
5. The 22 largest corporation is Illinois paid an average of 2.07% in taxes in 2009, while the average small business is now paying 7%. Here is a list of the largest & the rates they paid (I think these numbers are in millions; the tax rate is the more important stat):
COMPANY TAX PAID PRE-TAX INCOME TAX RATE SECTOR
22. Exelon: 1,454 tax paid millions; 32,057 pre-tax income; 4.54% tax rate; energy sector
21. Walgreens: 1,150 tax paid millions; 27,781 pre tax income; 4.14% tax rate; drugs
20. Tribune(1998-2007): 349; 9,382; 3.72%; Media
19. Fortune Brands: 313; 9,097; 3.44%; Consumer Prods
18. Discover Fincl Svcs: 305; 9,587; 3.18%; Financial Services
17. Kraft Foods: 1,488; 47,469; 3.13%; MFG
16. AON: 275; 10,034; 2.74%; Insurance
15. Illinois Tool Works: 509; 21,129; 2.41%; MFG
14. McDonalds: 1,029; 44,647; 2.30%; Retailer
13. Sears Holdings: 474; 23,910; 1.98%; Retailer
12. Motorola: 258; 13,907; 1.86%; MFG
11. Archer Daniels Midland: 309; 17,567; 1.76%; Agri Prods.
10. Accenture (00-09): 345; 20,724; 1.66%; Consulting
9. Deere: 279; 19,540; 1.43%; MFG
8. Northern Trust: 131; 10,176; 1.29%; Financial Services
7. Wrigley (1998-2007): 75; 6,302; 1.19%; MFG
6. Abbott Labs: 619l 52,542; 1.18%; Drugs
5. Caterpillar: 315; 30,412; 1.04%; MFG
4. Baxter: 161; 18,596; 0.87%; Drugs
3. Sara Lee: 70; 13,083; 0.54%; MFG
1. Old Republic Intl: 0; 4,318; 0.00%; Insurance
1. Allstate: 0; 36,823; 0.00%; Insurance
Total all 22: 9,908 (tax paid); 479,083 (pre-tax income); 2.07% (tax rate)
SIDE NOTE: I had never heard of Old Republic International until this research was done. Also can any legislator justify 0% for this company & Allstate? I would love to hear that answer.
ECONOMIC EFFECT IN ILLINOIS (Estimated $25.1 Billion in lost tax revenue in 2009, & Illinois projected budget deficit for 2011 is between $6 billion & $13 billion). So, if we get one quarter to half of this back, we close the budget gap. This situation is a clear example of tax spending, & they should justify how these tax expenditures are benefiting the state by $25 billion.
This is also after Governor Blagojevich supposed closed these loopholes in 2007 with this http://tax.illinois.gov/
6. 384,000 homes are expected to go into foreclosure in Illinois as a result of the financial meltdown, & this is estimated to cost the Illinois tax payers $7.4 billion. Why isn’t the state going after AIG, Banks & Rating agencies to help cover the costs of their mismanagement?
7. The Illinois legislature is allowing a tax break for large corporation called “bonus depreciation corporate tax break.” This is estimated to cost the state $600 million per year. Ironically, Illinois is cutting $600 million per year in social services to residents this year.
8. Large purchasers of natural gas are able to avoid the utility taxes currently if they buy their gas from out-of-state. Why is this allowed?
9. According to “Make Wallstreet Pay Illinois,” an advocacy group that believes Wall Street should shoulder its fair share of the currently fiscal crisis, two of the largest banks reduced their lending to small business from 2007 – 2010. Bank of America reduced their loans by 97% to small businesses in Illinois, & JP Morgan Chase reduced their loans by 70%. Why are we giving breaks to companies that are not supporting our state?
10. Banks are currently able to borrow money at a half of a percent of interest, & then they charge the state the rates that were in place prior to the government bailout. Why is the state allowing the banks to make massive profits when these same banks helped cause the state’s financial crisis. Attorney General Lisa Madigan has been encouraged to follow California, Connecticut & Florida in determining if this practice constitutes fraud. These same banks regularly charge small businesses 5%-12% for the same money they obtain at a half of a percent. It would appear they have the money to shoulder their fair share of the expenses, & perhaps this practice also constitutes fraud.
11. The bill HB 1109 which would allow municipal governments to put liens on vacant properties that banks are holding & not maintaining died in committee. These costs are also being passed onto the people & businesses of Illinois. Why is the state allowing the banks to skirt this responsibility. Also, it has been alleged that banks are holding these toxic assets until the market rebounds, & it is estimated that 45% of all vacant homes have mold infestations due to lack of maintenance. Once again, these costs will ultimately be paid for the people & businesses of Illinois. Either get the homes on the market & let the prices fall where they may, or pay to maintain them.
12. The following article was from 2007, but it is eye opening to see how many loopholes there were at that time. http://blogs.chicagotribune.
13. Cook County based businesses are opening offices in small Illinois towns to obtain very low sales tax rates at the county & city level. This is legal apparently as long as they have an address there. This is estimated to cost public transportation alone over $260 million a year in lost revenues. I could not find anything that showed what the statewide affect is.
14.While Illinois passed the Illinois Religious Freedom Protection and Civil Union Act, which provide LGBT’s with broad protection & rights, it did not allow these people to file joint tax returns, & blamed the federal Defense of Marriage Act (DOMA) as their excuse. Is this right? I realize that this is not a small business issue, but I found it an shining example of our state governments way of doing business. On the surface they make it sound great, but the details don’t match the spirit of it.
Here are two of my own ideas for the elimination of other unfair tax spending, that I feel should be collected by the state, & would result is large tax spending decreases:
1. Foreign workers that work in the State of Illinois virtually (think India Call Centers & IT Outsourcers), but live in their own country, are swiping up jobs in this state, & across the country, at unprecedented rates. Even though they are not physically here, they cost the economy & the government of Illinois enormous sums by avoiding taxation, & heaping unemployment responsibilities onto the small businesses who have to pay SUTA. These foreign workers are working in Illinois, for Illinois companies, even though they are not physically here. How do we start taxing these businesses, for hiring these workers that are removing our jobs from the state? Are we giving tax advantages to companies that engage in these practices, & could we penalize them for doing so by pairing all their tax incentives with job creation criteria that equals their outsourcing activities. Also, can this strategy be used to level the playing field of Illinois businesses that don’t have the sophistication to maintain a business relationship on the other side of the planet, & can it do the same for residents whose jobs have been sent overseas by large corporations?
2. At the federal & state level, corporations are allowed to offshore profits to avoid taxation. The federal government is considering a “Tax Holiday” for these companies that would enable them to bring all those profits back onshore for a 5% tax rate, which is something like a 75%+ break on what they owe. This also occurred in 2004, & appears to be an established practice. I suggest that the state charge the full rate, interest & penalties to all businesses that are here, & who off-shored these profits.