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Governor Blagojevich wants to convince us to accept the
biggest tax increase ever sought in Illinois. He would have us
refinance embarrassingly large public pension obligations to
thrust long-term debt upon our children and grandchildren. He
even cited God as a partner to help sell his tax increases as
a moral obligation.
The Governor once again vigorously
attacks job providers and creators of wealth. The
anti-business rhetoric he conveyed during his state of the
state speech was the most biased demagoguery I have witnessed
from a Governor delivering official remarks. His speech was a
blatant appeal to class warfare, and unbecoming of a Governor.
The Governor reprimands the business community with a
shameless tirade against anonymous, non-voting, big
corporations. His solution to Illinois’ fiscal woes is more
revenue from the business community without a word about
restraint or living within our means. He simply contends
employers don’t pay their fair share of taxes.
This
is not true.
Recent tax burden studies compiled by
Ernst & Young revealed employers pay 49.8% of all state
and local taxes in Illinois, a higher percentage than
employers in other regional states and far above the national
average of 44.9%.
In 2006, Illinois employers paid
$29.1 billion in state and local taxes. Illinois corporations
paid $2.4 billion in corporate income taxes last year. This
includes the personal property replacement income tax (PPRT)
paid by corporations, but distributed to local governments.
Whether counted as state or local revenue, corporations paid
it.
Thanks to the nation’s economic recovery from the
last recession, corporate income tax payments increased in
Illinois by 45% since 2002, a growth rate that exceeds the
17.6% growth from individual income tax payers during the same
period. Yet Governor Blagojevich is not satisfied with one of
the ten most productive and efficient corporate income tax
laws in the country.
Politicians are schizophrenic
about the role of corporate income taxes. Sometimes they want
to use tax code to promote economic development and social
policy by reducing tax liabilities and encouraging certain
spending behaviors. Other times, like now, the overriding
philosophy is focused on simply extracting more money from
employers.
Some corporations may not pay incomes taxes
in a given year, but if they don’t there is a logical reason
(or they are going to jail). Being on Fortune’s list of
largest corporations does not guarantee profitability: look at
industry icons like United Airlines and Ford.
The
income tax code helps companies weather recessions by allowing
them to carry net operating losses forward to profitable
years. The code stimulates economic recovery by promoting
corporate spending on equipment during economic downturns. It
offers incentives to invest in underdeveloped areas,
encourages research and development and helps offset employee
training costs.
Many owners reinvest profits to
modernize, increase competitiveness, hire more people or
expand facilities. The Governor’s logic implies corporate
reinvestment is somehow depriving government of its fair share
of company money.
Corporate income tax liability is a
poor indicator of the true tax burden or economic activity
assumed by employers. Corporate income taxes only account for
8% of the total Illinois business tax burden. It ranks fifth
in importance after property, payroll, sales and use, and
utility taxes.
The cost of doing business in Illinois
continues to rise as a direct result of policies implemented
since Governor Blagojevich assumed office. Taxes and fees paid
exclusively by business were introduced and raised in 2003,
boosting state receipts by $319 million annually. Since 2003 a
new worker’s compensation tax has cost Illinois employers over
$100 million. Workers’ compensation benefit increases
established in 2005 have cost employers approximately $75
million. Unemployment insurance tax increases imposed in 2003
have drawn $700 million from Illinois employers. Total
estimated Workers’ Comp cost increases in 2006 approach $150
million. The state’s minimum wage increased twice in the last
five years and will continue to increase for the next three.
The Governor’s latest demand of Illinois business is
$6 billion in revenue from a new gross receipts tax on
practically every transaction. He also seeks a new 3% payroll
tax to generate over $1.1 billion, which can be characterized
as a no-interest loan to the state from employers who may
receive the benefit of a future credit or refund.
How much is enough?
The political
appeal of a gross receipt tax is understandable; politicians
with big government spending plans can mask the true costs
from citizen taxpayers by washing revenue through the many
transactions that occur in the course of doing business. This
is commonly called tax pyramiding. It compounds tax
liabilities throughout the supply chain until the cost falls
on the final consumer in the form of higher prices.
In
contrast to the political motive of hiding taxes, most
thoughtful taxpayers prefer more transparent approaches to
taxation because, painful as they may be, it raises our
expectations for greater accountability from government.
The Governor’s claim that small businesses under $1
million in gross receipts will be exempt is misleading. A
small company may be exempt from collecting and remitting the
tax, but it will pay higher prices to suppliers and service
providers who are not exempt and must hike prices to
compensate. Exempt or not, the small business will continue to
pay income and CPPRT tax.
The Governor either fails to
understand supply chain pricing or chooses to ignore it in
misrepresenting the consequences of his proposed new gross
receipts tax. It is hard to imagine taking $8 billion or more
out of the private sector’s pockets won’t disrupt the state’s
economy. What is he thinking? |
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