If Illinois cuts corporate taxes in half as House Speaker Michael Madigan proposes, the state will certainly gain companies and jobs, but those gains will not be enough to make up the lost revenue, experts say.
For every 1 percent cut in taxes there will be a 3.5 percent increase in the number of business establishments, according to economist Juan Carlos Suarez Serrato, of the Stanford Institute for Economic Policy Research.
That trade-off could benefit the state in terms of jobs but could still leave it scrambling to close an even wider budget deficit.
Serrato says his research shows “It’s unlikely that if you cut the tax from 7 percent to 3.5 percent that you’re going to have more revenue.”
Yet increased business activity resulting from the tax cut would make up for some of the $1.5 billion in revenue the state would lose through the summer of 2015. But economists could not say how much.
According to Serrato, most of the benefit of corporate tax cuts — around 40 percent — goes directly into to pockets of companies. Some 35 percent goes to workers and 25 percent to property owners.
And since companies and landowners tend to be richer, “getting rid of the corporate tax is something that is probably going to increase inequality,” Serrato said.
But Scott Drenkard, an economist at the Washington, D.C.-based Tax Foundation Center for State Tax Policy said it’s the corporate taxes that are unfair. “A system that asks a small part of the population to pay a disproportionate amount of the costs of government is not good tax policy,” Drenkard said.
“Reducing the corporate income tax is a good bang for your buck,” he added. “It’s not as difficult to make up that revenue, and it’s one of the ways that states can be competitive for businesses that have very mobile capital.”
However, Illinois will still lose revenue if the tax is cut, especially at first, and the money lost will have to be made up somewhere. That could lead to sales tax or income tax hikes, which mainly affect the poor.
“If we want to raise less of our state money from corporate taxation, what do we want to turn to?” asked Paula Worthington, an economist and senior lecturer at the University of Chicago Harris School of Public Policy Studies.
She said the most likely alternatives would be sales and income taxes, which could produce more revenue if exemptions were cut.
On the positive side, a corporate tax cut could help address concerns “that we have a deteriorating business tax climate in the state,” Worthington said. “Those concerns are only exacerbated when you think about prospective liabilities for things like underfunded pensions.”
Such worries have been reflected in the Business Tax Climate Index, a measure of how friendly states are to business that is put together by the Tax Foundation. Since 2011, the corporate and other tax hikes have contributed to Illinois falling from 17th to 31st place on the index.
Corporate taxes account for 20 percent of the index, “So reducing that rate is going to improve the score and might improve it pretty sizably,” said Drenkard.
A Tax Foundation review of 26 major studies showed 23 of them found a negative link between taxes and growth. “As taxes go up, growth goes down,” Drenkard said.
He also noted that a corporate tax cut would also give companies less of an excuse to ask for and get special exemptions, as happened when Sears and the Chicago Mercantile Exchange threatened to leave the state after the rate was hiked in 2011.