How Illinois’ economic development agency flouts the law in plain sight

The DCEO’s decision to play by its own rules deserves scrutiny not only because of its monetary cost, but because it involves a fiduciary failure symptomatic of governmental disregard for the rule of law. It exemplifies a political culture that must change if Illinois government is to turn the corner and move toward restoration and renewal.

Illinois has used the Economic Development for a Growing Economy, or EDGE, Tax Credit Act to dole out nearly $1 billion in tax credits to businesses since 2001. The act establishes that EDGE tax credits can only go to businesses creating new jobs in the state. But the Department of Commerce and Economic Opportunity, or DCEO, created its own regulations under which the agency gave out EDGE tax credits to companies for “retained” jobs.

The Liberty Justice Center, a public-interest law center, filed a lawsuit on Jan. 9 on behalf of Illinois taxpayers against the DCEO to stop the state agency from granting tax credits in excess of the statutory limits set by the EDGE Act.

The lawsuit alleges that the DCEO has approved hundreds of millions of dollars in EDGE tax credits –perhaps as much as half of the nearly $1 billion tax credits approved over the life of the program – in violation of the limits established in the law.

The DCEO’s decision to play by its own rules deserves scrutiny not only because of its monetary cost, but because it involves a fiduciary failure symptomatic of governmental disregard for the rule of law. It exemplifies a political culture that must change if Illinois government is to turn the corner and move toward restoration and renewal.

Illinois media have been watching the EDGE program and reporting on its progress through the years, bringing attention to the high cost of the program and the special deals made for the privileged few, and asking the necessary questions: Can we really afford this? Is this really working?

But all along, the bigger question was hiding in plain sight. Did the DCEO have the legal authority to dole out the substantial amount of EDGE credits that it calculated on the basis of jobs retained by companies receiving the credits?

One brief look at the law, and the answer is clear. “The credit shall not exceed … the total amount withheld [for Illinois Income Tax] during the taxable year from the compensation of New Employees.” Only new employees are referenced in the law.

And yet, the DCEO created a rule, in direct defiance of the law, to allow credits to be measured by the amount withheld for Illinois Income Tax during the taxable year from the compensation of both new employees and retained employees, greatly expanding the scope and cost of the program.

This is a textbook example of a violation of administrative law that any first-year law student would understand. Administrative rules cannot disregard or contravene the law they are intended to implement. They cannot empower an agency to act beyond the scope of the underlying law.

This rule was not a scrivener’s error; nor was it the work of a rogue department lawyer. It has all the markings of a carefully crafted, very intentional effort to override the limitation clearly established in the law with clever redefinition and turn of phrase.

The DCEO did not operate in a vacuum as it promulgated its rule and took for itself power that the law did not provide. The rule required agreement – or at least acquiescence – from several other players in the rulemaking process. Multiple reviews of the rule should have served as checks on the DCEO’s action.

The Department of Revenue would certainly have reviewed and commented on the DCEO rule, because it was ultimately responsible for administering the EDGE tax credits used by EDGE program participants to reduce their income-tax liability. Interestingly, in its own rule to implement the EDGE Act, the revenue department used not the expanded limit created by the DCEO’s rule, but rather the narrower limit established in the law. Thus, the two departments, to this day, have conflicting standards.

Because the EDGE program was a significant initiative for former Gov. George H. Ryan, and because it would have a substantial fiscal impact, both the governor’s office and his budget office typically would have reviewed and signed off on the DCEO’s rule.

Finally, the law required review and approval by the Joint Committee on Administrative Rules – the General Assembly’s watchdog against administrative mischief – before the rule could go into effect.

If there were objections to the rule during the review process, it seems they had little impact. Each step of the way, individuals responsible for stewarding the state’s resources ultimately acquiesced to the enactment of a rule that disregarded the limitation set by law, expanded the scope of the EDGE credit program and cost the state hundreds of millions of dollars.

DCEO officials seem to have judged the constraints of the law too confining. With a sense of entitlement to do things their own way, and to make the EDGE program function according to their own wishes, they chose to “fix” the law with an unlawful rule.

Such arrogance and lack of respect for the law must change if Illinois is to begin to flourish. Gov. Bruce Rauner can take immediate action to correct this failure of stewardship by directing the DCEO to operate the EDGE program within the limits of the law, not in accordance with its unlawful rule.