Illinois has given companies more than $830M in EDGE tax credits since 1999
Illinois’ Economic Development for a Growing Economy, or EDGE, tax credit program has been making the news from time to time during recent months, mostly in the context of discussions on how to reform Illinois taxes and grow Illinois’ economy simultaneously. The program is on the chopping block. Notably, talk of changes to the EDGE...
Illinois’ Economic Development for a Growing Economy, or EDGE, tax credit program has been making the news from time to time during recent months, mostly in the context of discussions on how to reform Illinois taxes and grow Illinois’ economy simultaneously. The program is on the chopping block.
Notably, talk of changes to the EDGE program began back in December 2013 when House Speaker Mike Madigan refused to hold votes on two bills offering special credits for companies threatening to leave Illinois. He later issued a statement indicating, in part, “We must resist the temptation to cave to corporate officials’ demands every time they impose a deadline for payment in exchange for remaining in Illinois, and end the case-by-case system of introducing and debating legislation whenever a corporation is looking for free money from Illinois taxpayers.”
He was right.
Again, he was right to seek greater accountability from both the Department of Commerce and Economic Opportunity, or DCEO, which administers the program, and the companies seeking the EDGE tax credits themselves.
Unfortunately, some of the new conditions he proposed were cumbersome and unworkable, and he got the anticipated blowback from several business associations. But the truth is, reform (or even elimination) of the EDGE program needs to be considered. Illinois businesses need a clear and simple tax system that doesn’t require hiring lobbyists, lawyers and accountants to benefit from special provisions to achieve a reasonable tax burden.
What is the EDGE tax credit program?
The Economic Development for a Growing Economy, or EDGE, program has been administered by the Illinois Department of Commerce and Economic Opportunity, or DCEO, since 2001. It has become the largest income tax incentive for businesses in Illinois. It is designed to authorize income tax credits for companies that invest in facilities and hire and/or retain employees in Illinois. The size of the tax credit is generally limited by the number of qualifying employees and the amount of Illinois income tax withholding applicable to them.
The EDGE credit is typically a nonrefundable credit applied against the Illinois income tax liability of the credit recipient. However, in addition, a special EDGE credit, approved in special legislation for a handful of large companies with no income tax liability, can be applied against the income tax withholding that the recipient company would otherwise have to pay on behalf of its employees. As a result of the special EDGE credit, not only does the state collect no income tax from the company, it also collects no personal income tax withholding from the company on behalf of its employees. Rather, the money remains in the company’s coffers. As at least one economic development professional has admitted, this is crazy, and it is costing the state dearly.
Between Dec. 22, 1999, and Dec. 31, 2013, DCEO has approved $832.7 million in EDGE credits pursuant to 774 signed agreements with 254 different companies, according to the 2013 EDGE Tax Credit Program Annual Report. In addition, DCEO has entered into special EDGE credit agreements with just nine companies worth a total of $494.1 million.
Concerns about the EDGE program
Good tax policy calls for ease of administration, ease of enforcement and ease of compliance. To accomplish this, a tax program must be relatively simple and clear. By this measure, the EDGE program is a failure. A tax program must also be fair, and treat all taxpayers the same, as much as possible. It should also be transparent and accountable in order to affirm its fairness. Again, the EDGE program does not measure up. Allowing the credit to be used against payments of withholding tax created a whole new level of complexity and allowed taxpayers who pay no income tax of their own to receive tax credits anyway.
1. Lacks ease of administration and enforcement
There are many aspects of the EDGE program that raise concern, administratively. As a tax incentive program, it is properly within the jurisdiction of the Illinois Department of Revenue, or IDOR. Yet, because it is in fact an economic development grant program in the form of a tax incentive, a separate bureaucracy in DCEO is authorized to oversee and administer the program, and to approve the issuance of tax credits. This can easily put the two departments at odds with one another. Furthermore, the DCEO bureaucracy has served only 300 taxpayers over more than a decade of activity according to its 2013 annual report – an average of only 25 per year.
The detailed eligibility requirements for EDGE credits result in complex and burdensome administrative procedures to verify eligibility and determine the amount of the tax credit. To receive an EDGE credit, an applicant must claim that, if not given the EDGE credit, it would not pursue the project in Illinois – a claim that cannot be proven prior to approval of the credit. This creates a dilemma that can lead to the use of excessive administrative discretion to approve credits. The fact that credits, once approved, can continue to accrue for a period of 10 years, requires oversight and constant review of the approved credits over an extended timeframe.
2. Lacks ease of compliance
The same factors that cause undue complexity in program administration also cause confusion and difficulty in program compliance for the applicants. Detailed qualifications must be met, and assurances must be given about future levels of capital investment and numbers of employees. Applicants must prove a negative in order to qualify – they must prove they won’t pursue their project in Illinois unless they receive the EDGE credit. This leaves far too much room for administrative discretion on one hand and for insincere claims in the application process on the other.
It is wrong to make taxpayers jump through such hoops to achieve a reasonable income tax burden. The EDGE program has the feel of a full employment program for government bureaucrats, lawyers and lobbyists. It adds undue complexity to the tax system and helps only a few at the expense of the many.
3. Lacks perceived fairness, transparency and accountability
Only a small number of companies, less than 300, have benefitted from the EDGE program. These companies have had to jump through hoops and make claims and commitments in order to receive the tax breaks. Some have had to hire lawyers and lobbyists to get their tax credits. On the other hand, DCEO has inordinate discretion to approve or deny, on a case-by-case basis with minimal public or legislative oversight, the award of hundreds of millions in tax benefits that can be drawn by the recipient for as long as a decade. At a minimum, this opaque process breeds skepticism and uncertainty about the fairness of the EDGE program. DCEO’s annual reports, which give little information about the amount of tax credits approved, don’t help to overcome this skepticism.
Moreover, the General Assembly’s involvement in passing several pieces of legislation to authorize large amounts of “special” EDGE credits to a handful of large, Illinois-based companies who have no liability for Illinois income taxes has created an even stronger perception that the program is for the select few who have the necessary clout to get a piece of the pie.
Furthermore, the special EDGE credits allow a company that has no liability for Illinois income tax to keep for itself the personal income tax it withholds from its employees’ paychecks instead of paying it over to the state. If that sounds absurd, that’s because it is. It means that EDGE credits not only divert substantial amounts from corporate income tax receipts, but also from individual income tax receipts of the state.
Where to go from here?
Illinois needs to have a comprehensive review of its tax system. Rather than carving out large exemptions like the EDGE program that add bureaucracy and complexity to tax administration and compliance, general income tax rates should be lowered. Moving to a simpler, clearer system with lower rates and fewer carve-outs for special treatment is the direction to go. Eliminating the EDGE bureaucracy and the program itself would be a good first step in tandem with a reduced tax rate.