03/31/2014
Lily Oberman
According to a recent report published by the Center for Tax and Budget Accountability (CTBA), tax breaks may not be the best way to boost job growth.
Many state governments push legislative agendas that offer friendly tax breaks to small businesses, which the Small Business Administration defines as businesses with fewer than 500 workers. In 2011, small businesses represented 99.9 percent of businesses nationwide.
Illinois is no different. Ninety-seven percent of the state’s small businesses have no more than 20 employees, which consists of 16.6 percent of all private-sector workers.
This latest report—conducted across a “broad ideological spectrum”— seems to reaffirm previous studies that show there is no statistically significant correlation between a state’s tax policies and economic activity. The CTBA has been a leading critic of the state’s tax policies, which it views as antiquated and ill-suited to Illinois’ modern economy.
The study arrives at a time when Illinois lawmakers face a major decision on the Illinois income tax, which is scheduled to drop by 25 percent at the end of the year. Gov. Pat Quinn has proposed making permanent the current tax rates, which were raised from 3 to 5 percent in 2011 on a temporary basis. House Speaker Michael Madigan has proposed cutting the corporate income tax rate in half and also has introduced a bill to impose a 3 percent tax on incomes of more than $1 million.
Another recent CTBA report cast doubt on claims by business interests that Madigan’s “millionaire tax” would further erode the state’s reputation for having a hostile business climate.
CTBA cited findings by Noah Berger and Peter Fisher of the Economic Analysis and Research Network who found that slashing business taxes in return for state service cuts have been ineffective at spurring long-term economic growth.
According to CTBA’s latest report, there are several reasons why business tax breaks have proved to be inefficient in job creation and economic growth:
- State income taxes are a minor portion of a business’s overall tax burden, which represent just eight percent of the taxes that businesses pay in the state of Illinois, especially for small businesses. By law, the majority of these organizations are exempt from paying corporate income tax.
- According to the latest data published by the Illinois Department of Revenue from 2010, businesses that were liable to pay corporate income taxes paid $5,000 or less in income taxes. Nearly 70 percent of these companies had ‘no state corporate income tax liability whatsoever.’
“Since the end of the Great Recession through the third quarter of 2013, corporate profits grew by 35.3 percent nationally, while wages grew by just 5.9 percent and gross domestic product growth was just 8.4 percent,” noted CTBA’s study. “Meanwhile, private sector job growth has lagged prior recovery periods, and has yet to replace all the jobs lost during the Great Recession, much less grown at the rate necessary to keep pace with new entrants into the labor market.”
An additional study, conducted by Michael Mazerov at the Center on Budget and Policy Priorities, found strong evidence that cutting state income taxes could eventually threaten the future success of small businesses and entrepreneurs by reducing resources designated for essential services such as education.
By investing in education, infrastructure and other core services, Illinois could best support small businesses, job creation and economic growth.
“The evidence shows that providing access to a high quality public education is more likely than tax incentives to improve a state’s economy over time,” according to the study.
More importantly, the primary tax paid by small businesses is local property tax—rather that corporate or personal income taxes.
- “Property taxes represent almost 40 percent of the taxes businesses pay in Illinois, while corporate income taxes come in at just [eight] percent and flow through personal income taxes just 4.9 percent of overall business taxes.”
In other words, Illinois relies far too heavily on property taxes to fund public services such as schools, and 51 percent of business taxes go to local governments rather than the state. Compared to the national average, 46 percent of business taxes go to local governments.
Since the majority of local property taxes in Illinois are allocated towards funding public education, it creates an unfair funding system that correlates local property wealth to school quality.
According to the study, “Illinois currently ranks last in the nation in the portion of education funding covered by state rather than local revenue, and first in the nation in reliance on local property taxes to fund schools.”
By summarizing these key findings, the authors found that in order to reduce small business taxes while stimulating economic growth, tax policy should be reformed “in a manner that builds the state’s fiscal capacity to invest in core service—while lessening reliance on the local property tax—rather than cutting state level corporate or personal income taxes.”
Here is the full study.
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