Rauner ends tax breaks for companies that create no new jobs

Gov. Bruce Rauner announced plans to restrict tax breaks for companies for retaining existing employees – putting an end to excessive tax credits that have cost taxpayers hundreds of millions of dollars.

For years, Illinois’ state government has disregarded a law that limited the amount of tax credits the state could award to businesses to encourage them to stay in Illinois and expand their hiring in the state. As a result, it has awarded certain businesses hundreds of millions of dollars more than it should have. An announcement from Gov. Bruce Rauner on Nov. 10 suggests that practice is finally, rightly coming to an end.

What the state is supposed to do

The Economic Development for a Growing Economy Tax Credit Act, or EDGE Act, authorizes the Illinois Department of Commerce and Economic Opportunity, or DCEO, to award tax credits to businesses that create new jobs in Illinois.

But DCEO can’t issue those credits in just any amount it wants. The EDGE Act requires the amount of a business’ credit for a given year to be limited to the amount of income taxes withheld from new employees the business hires after entering into a tax-credit agreement with the state.

What the state has actually done

But DCEO has ignored that limitation from the very beginning, under both Republican and Democratic administrations. Shortly after the enactment of the EDGE Act in 1999, DCEO adopted a regulation that purportedly authorized it to award tax credits to a business up to the amount of both new employees and old (or “retained”) employees hired before the company entered into a tax deal with the state.

In other words, unelected DCEO bureaucrats effectively rewrote the law to remove a key limitation on DCEO’s power to award tax credits.

As a result, DCEO has given out hundreds of millions of dollars more in tax credits than it should have. In fact, some businesses even received tax credit awards without hiring any new employees at all.

The effect of this is to shift more of the tax burden onto ordinary taxpayers – including the owners of small businesses that don’t get special tax deals.

But in January, the Liberty Justice Center filed a lawsuit against DCEO on behalf of taxpayers seeking to end DCEO’s excessive tax-credit awards. That case is currently being considered by the Illinois Fourth District Court of Appeals.

Rauner’s reform

The Rauner administration’s announcement sets forth its policy of ending EDGE tax credits “for job retention” and awarding them “only for capital investment and net new job creation,” among other changes.

Under Rauner’s reform, DCEO will finally have to start following the law. DCEO should follow up on this announcement by amending its regulations to eliminate the provision that purports to authorize tax credits for “retained jobs” in violation of state law.

With the EDGE program reined in, the state can stop relying so heavily on special tax deals to lure and keep businesses and instead focus on creating a freer, more welcoming business climate for everyone.