Illinois corporate tax breaks serve as blank checks for big business
Illinois taxpayers are the ones who must ultimately pay the price for crony deals.
Business and sales gurus often encourage the art of “underpromising” and “overdelivering” as a way to develop a reputation for consistently satisfying the customer.
But when a company underpromises in an agreement with Illinois’ Department of Commerce and Economic Opportunity, or DCEO, to receive tax credits in return for creating new jobs, Illinois taxpayers pay a hidden, heavy price when the company later overdelivers on its promise. This happens because the DCEO calculates the amount of the tax credits it issues based not on the number of jobs “promised,” but on the number of jobs “delivered.”
Under the Economic Development for a Growing Economy, or EDGE, Tax Credit Act, the DCEO is authorized to issue tax credits to companies that promise to create jobs and invest in new capital projects. An EDGE agreement binds the DCEO to issue tax credits to a company annually over a period of 10 years as long as the company fulfills its promises on jobs and investment.
Under an agreement, achieving the number of jobs “promised” determines eligibility to receive tax credits. However, the number of jobs “delivered” determines the actual tax credit amount. The discrepancy between the two, it turns out, can be dramatic.
EDGE tax credit amounts are based on the calculation of the “incremental income tax,” an amount equal to the Illinois income tax withheld from employees whose jobs are included among those “delivered” in accordance with the agreement between the company and the DCEO. So, for one qualifying job with an annual salary of $50,000, an EDGE tax credit of approximately $2,500 (5 percent) could be issued by the DCEO.
Taking the example a step further, if a company promises to create 50 new $50,000 per year jobs and then creates 500, instead of receiving annual tax credits of $125,000, it will be eligible to receive tax credits of $1.25 million annually. Over the 10-year life of an agreement, the state budget will have to support the payment of $12.5 million on an agreement that would pay only $1.25 million had the amount of the tax credits been based on the promised jobs.
Thus, this lowballing technique deceives the public in several ways. First, it gives the appearance that the state’s financial obligation is smaller than it really is. Second, the actual cost of the state’s commitment is hidden and, in fact, can’t even be calculated, at the time of the agreement. Third, it protects the company receiving the tax credits from the downside risk of losing eligibility for not fulfilling its promises.
Could this really be happening in the EDGE program? You bet it is.
Annual progress reports filed by EDGE tax credit recipients in accordance with the Corporate Accountability for Tax Expenditures Act reveal that many of these companies underpromised on job creation or retention when they entered into EDGE agreements with the DCEO. And it is costing Illinois taxpayers millions of dollars as the companies now overdeliver.
Coyote Logistics made the news recently for receiving a $2.5 million grant from the DCEO in return for a promise to hire 500 more employees. Back in 2010, Coyote entered into an EDGE agreement with the DCEO, and promised to hire 100 new employees to be eligible for EDGE tax credits. But by the close of 2012, Coyote had hired nearly 900 new employees.
For 100 new employees at an average salary of $50,000, the annual cost of the EDGE tax credits would have been approximately $250,000. Instead, the cost to the state of the EDGE tax credits issued to Coyote in 2012 was $1.9 million, and jumped to $2.3 million in 2013. Over 10 years, at this rate, the state will have to cover more than $40 million in tax credits instead of $2.5 million if the credits had been based only on the promised jobs.
Moreover, when Coyote hires the additional 500 employees it promised in return for the new, $2.5 million grant, it may be eligible for an extra $1 million in EDGE tax credits annually on those jobs as well, under its existing EDGE agreement.
Coyote is far from alone in this practice of lowball promises. It has been going on since the early days of the EDGE program with some of the highest-volume recipients of EDGE credits. Chrysler Group made no promise to create jobs in its EDGE agreement with the DCEO, but then created nearly 2,000 jobs eligible for the tax credit, adding millions to the state’s obligation for tax credits. Ford did the same thing.
In the same way, Navistar promised to create 400 jobs in its EDGE agreement, but created nearly 1,500 jobs eligible for the tax credit. Takeda Pharmaceuticals, U.S. Cellular, Hospira and many, many more all promised low and delivered high.
Their lowball promises for job creation, as agreed to by the DCEO, ultimately led to millions more in state obligations for EDGE tax credits than anyone outside of the DCEO could have anticipated, given the terms of the agreements.
These are just a few examples of how underpromising and overdelivering have created serious problems in the EDGE program and hefty financial obligations for the state. Sadly, Illinois taxpayers are the ones who must ultimately pay the price.