Taxpayer Relief Act Is Misleading

By The Taxpayers' Federation of Illinois

This article is in reply to an article that appeared in the March/April 1984 issue of IPR entitled "Taxpayer Relief Act of 1984 Would Help Park Districts, Coalition Leader Asserts." Patrick Quinn, director of the Coalition for Political Honesty, was author of the article.

The Taxpayer Relief Act appears to promise immediate redress of what is almost certainly the most regressive major state tax, the public utility tax. The Taxpayers' Federation of Illinois believes, however, that in this case the "cure" is worse than the illness: The Taxpayer Relief Act would curtail government revenues and prove a major detriment to Illinois businesses and economy.

Proponents of the Taxpayer Relief Act have offered little by way of hard data to support their claim that the three corporate tax "loopholes" they propose to close "will cost Illinois taxpayers more than 500 million dollars in the coming fiscal year."

This article will present some of the salient facts concerning the public utility tax and Patrick Quinn's proposals regarding corporate taxation.

THE PUBLIC UTILITY TAX

The public utility tax on electricity was first imposed in 1937; the taxes on gas and message transmission began in 1945, all at an initial rate of 3 percent. The rate for all three was raised to 5 percent in 1967. The tax was a relatively minor part of state revenues until it grew dramatically in the 1970s. By 1981 revenues had reached $535.67 million, nearly 3 1/2 times their level of $153.5 million just 10 years earlier. In the period 1978-84, the public utility tax take increased at an annual rate of 14.9 percent. It is currently the third largest source of revenue for the General Fund: The Illinois Economic & Fiscal Commission estimates it will generate $710 million in FY 85.

The state utility tax burden varies in communities around the state. For example, the average residential customer in Chicago's Loop area will pay an estimated public utility tax of $97.32 this year, out of a total utility bill of $2,043.78. In the Arlington Heights area in suburban Cook County, the average total utility bill is $2,163.53, of which $103.02 is public utility tax. On the other hand, residential customers in the Alton area will pay an estimated $1,577.64 this year, of which $75.73 will be state utility tax. Throughout the state, the Illinois Commerce Commission tax of .08 percent and the municipal utility tax, where applied, are also included in these calculations. Monthly savings which would accrue to residential taxpayers if the Taxpayer Relief Act were passed are displayed in Chart 1. According to the Federation's survey, a savings of $50 a year is high: average savings in most areas in the state would be less.

Businesses pay more utility tax than residential customers. According to Taxpayers' Federation calculations, commercial and industrial users pay 54.7 percent of total utility tax revenues, whereas residential users pay 41.6 percent. The balance includes sales to governments. Assuming a reduction of 2 1/2 percent in the tax rate would yield $330 million, $180.5 million of this amount would be savings to commercial/industrial users, while $137.3 million would accrue to residential users.

The utility tax, then, is a definite problem. The tax is a regressive burden attached to an essential service; poor taxpayers devote a larger portion of their income to paying it than do the more well-to-do. Also, the weight of this tax has grown out of proportion to its original tax structure role. The Taxpayers' Federation of Illinois supports responsible measures dealing with the taxation of energy usage and inefficient energy consumption.

However, the Federation takes exception to the tax proposals suggested by Mr. Quinn.

While a simple reduction in the tax rate may result in an immediate tax savings and the appearance of a reduced utility bill, the monthly savings would be small. Also such an action would do nothing to improve long term energy consumption patterns in this frostbelt state. Because utility taxes are applied as a percent of utility costs, a long lasting reduction will only occur through reducing the cost and use of energy.

A more appropriate approach to the problem of rising utility bills would be to focus on energy conservation. Energy conservation is a more practical and direct answer to the reduction of utility bills and can result in a greater savings because it reduces the total cost and not just the cost of the tax.

Another alternative is to change the method of utility taxation. Consideration might be given to a flat tax similar to the method used for motor fuel rather than a gross receipts tax, which rises automatically with the cost of service.

CORPORATE TAX CHANGES EVALUATED

The Taxpayer Relief Act proposes to make up the $330 million loss in state tax collections by a combination of three corporate tax changes. The bill would: 1) cancel the investment tax

Chart 1 Estimated monthly savings from the Taxpayer Relief Act Selected urban areas
Chicago Loop area	$4.06
Outside Loop area	4.10
Chicago suburbs Arlington Heights	4.29
Evanston	3.37
Downstate Springfield	3.60
Alton	3.16
Carbondale	3.20
Sources: Illinois Commerce Commission, Illinois Belt Telephone Co., General Telephone Co. Compulations by Taxpayers' Federation of Illinois

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credit scheduled to take effect July 1, 1984, 2) "decouple" from the federal Accelerated Cost Recovery System enacted in 1981 and modified in 1982, and 3) institute worldwide apportionment for corporate income tax purposes.

INVESTMENT TAX CREDIT

Canceling the investment tax credit is the only proposal in the package for which a fairly firm revenue estimate exists. The Illinois Economic & Fiscal Commission has estimated the provision will prevent the loss of approximately $40 million. This estimate is a ceiling. The actual impact will be less—probably substantially less—because the $40 million figure assumes that all companies making qualifying investments in Illinois will be profitable and have tax liability against which to apply the credit. However, none of this relatively small amount would replenish state funds. The Investment Tax Credit is to be applied against the Corporate Personal Property Replacement Tax. Consequently, the revenue gained from this change will be allocated directly to local governments.

Given its lack of relevance in the task of replenishing lost public utility tax revenue, it seems this measure might have been included merely to make corporate taxpayers appear as receiving excessive benefits, or to persuade local governments to place the Quinn referendum on their ballot. In either case, it is a misleading component and only adds confusion to the question of replacing lost utility tax revenues.

DECOUPLING

The second measure in Mr. Quinn's program, "decoupling" from the Accelerated Cost Recovery System (ACRS), is a term with a variety of different meanings. In HB 1736, decoupling adds back to taxable income one-fifth of the deduction available to taxpayers regarding recovery property under ACRS for federal income tax purposes.

The effects of this provision, if enacted into law, would be negative. First, from the standpoint of tax administration, both taxpayers and tax collectors recognize the advantages of simplicity and uniformity in the administration of tax laws. The existing "piggyback" method used in the majority of states, including Illinois, is a positive feature of state taxation. It is inefficient and complicated to require corporations to maintain separate accounting schedules. Illinois should not take actions which would require wasteful, non-productive paperwork.

Second, the add back provision is a worse approach to depreciation than existed prior to the Economic Recovery Tax Act (ERTA) of 1981. It is important to note that accelerated depreciation is a timing benefit and not an unexpected dollar benefit. While it may have taken a few more years to depreciate an investment prior to ERTA of 1981, at least the investment was recovered. Mr. Quinn's approach would prevent 20 percent of the investment from ever being depreciated for state tax purposes. Thus, Illinois taxpayers, particularly those engaged in the acquisition of new equipment, including small business operations, partnerships, and sole proprietors, would perceive it as not only an added cost but a penalty for capital investment. Such is counter to the national economic policy which intends to encourage business investment. It would be interpreted as a disincentive to do business in Illinois.

Although decoupling is perceived as a widespread practice, unless state laws change again this year, only nine states will be decoupled after 1984. Those states which chose to decouple did so in 1981 and 1982 during a time of great fiscal stress, when tax increases and adjustments were common. If Illinois were to decouple now it would be bucking the dominant trend of state tax policy.

WORLDWIDE APPORTIONMENT

Perhaps the least understood of the revenue recovery measures proposed by Mr. Quinn is the change in apportionment for corporate income taxes from the "waters edge" method currently in use in Illinois to "apportionment of the entire worldwide business net income of the unitary group."

At this point there are no hard facts concerning the amount of revenue to be gained from worldwide unitary. It seems probable, however, revenue yield will fall far short of the mark. First, proponents of worldwide unitary tend to ignore the fact many companies would pay less under such a scheme than they do at present. For example, the Illinois Department of Revenue estimates that $180 million in refunds will be awarded this fiscal year to taxpayers who benefited from the worldwide unitary approach in effect during the late 1970s.

Even given the most wildly optimistic assumptions, such a tax change in Illinois would not generate sufficient revenue to close Mr. Quinn's budget gap. Consider the following. About 28-31 percent of corporate tax revenues in Illinois comes from unitary companies, both national and multinational. Let's assume for a moment that 31 percent—the full amount—comes from multinationals. According to the Illinois Economic & Fiscal Commission, state corporate income tax collections will total $495 million in FY 85, 31 percent of which is $153 million. Even if taxing all multinationals in Illinois resulted in an astronomical average increase of 50 percent in their Illinois tax bills, only slightly more than $75 million would be generated.

Illinois has wrestled with the issue of worldwide unitary for ten years. The compromise now in place, which permits modified domestic combination, represents hard thinking and hard bargaining on the part of tax policy makers and business interests. The Illinois approach is being seriously considered by other states as a reasonable solution to what has become a national problem.

Tremendous complications have resulted from the lack of a national approach to state taxation of multinational corporations. The issue has been (Continued on p. 20)

ABOUT THE TAXPAYERS' FEDERATION: The Taxpayers' Federation of Illinois is a non-partisan, not-for-profit research and lobbying group. Founded in 1940, the federation seeks to promote efficiency and economy in government, and rational tax policy which is fair to all taxpayers. For additional information about the organization, contact the federation at 525 West Jefferson, Suite 506, Springfield, Illinois 62702 (217) 522-6818. This article is adapted from the February 1984 issue of the Federation's newsletter, Illinois Tax Facts.

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brought to the attention of the White House by leaders of foreign governments. President Ronald Reagan has established a working group, including Illinois Governor Thompson, which has been pursuing recommendations for appropriate actions to be taken by the states or the United States Congress.

The state's revenue shortfall after adopting the Taxpayer Relief Act could exceed $200 million, or the cost of operating the Department of Children & Family Services."

By scrapping the compromise and returning to a worldwide approach, Illinois could lose economic ground to states such as North Carolina and Georgia, which have disavowed it and are busy touting their positions as highly advantageous to economic development. Nor should the legislature ignore signals from Minnesota and Florida, which are reconsidering their recent rush to embrace it. Illinois has made a decision on corporate taxation and should stand firm.

In sum, Mr. Quinn proposes to create a substantial budget gap. And Mr. Quinn cannot provide reliable assurance regarding how the gap would be closed. The state's revenue shortfall after adopting the Taxpayer Relief Act could exceed $200 million, or the cost of operating the Department of Children & Family Services.

This proposal has sent decidely negative signals to the Illinois business community. If passed, HB 1736 might well prove a disaster both in terms of the state budget and a positive tax policy aimed at hastening the state's slow recovery from the recession.

Life. Be In It.

Illinois Parks and Recreation 20 May/June 1984