SPRINGFIELD — House Speaker Michael Madigan played a little role reversal Thursday, proposing to cut in half the state income tax on corporations, a move that could further frame this year’s elections along economic lines as Democrats try to stave off Republican efforts to win the governor’s office and lessen their grip on the General Assembly.
The call for a tax cut comes from the same powerful Southwest Side Democrat who only three years ago pushed through a major income-tax increase on individuals and companies and only last month decried that some companies “don't pay their fair share” in an attack on tax incentives requested by a few big corporations. Business groups gave it a mixed review, with some noting that most small businesses don’t pay the corporate income tax but instead the personal rate that wouldn’t be impacted by the plan.
Madigan’s move may be an attempt to undermine a Republican campaign theme that he and the Democrats who rule state government have enabled the deterioration of Illinois’ slow-to-recover economy and continued high unemployment, particularly through that 2011 tax hike.
“For many years, we have listened to employers about the best manner to improve the business climate. We have tackled worker compensation reform, reduced the estate tax and created an independent tax tribunal,” Madigan said in a statement. “Cutting the corporate income tax rate is another step I am asking the legislature to consider.”
But Republicans who are looking to unseat Democratic Gov. Pat Quinn this fall said that while the proposal is favorable to some traditionally GOP-allied business interests, it underscored that it is Madigan and not the governor who is really in charge. The tax cut idea was floated in the wake of Quinn’s State of the State address in which the governor proclaimed that Illinois is “making a comeback” but offered only small-bore proposals on how government can help bolster the state’s economy and reduce its 8.6 percent jobless rate — third highest in the nation.
“Speaker Madigan's proposal coming one day after the governor's State of the State address shows how even Madigan saw how little substance and vision there were in the governor's remarks,” said state Sen. Kirk Dillard of Hinsdale, a Republican candidate for governor who backed Madigan’s plan. “It's also clear that Madigan is running the show and setting the agenda.”
Quinn appeared a bit blindsided by the speaker’s proposal. At a Chicago event, the governor said he “didn’t talk to the speaker about anything on that subject” but added that “people are free to bring up anything they want” as part of negotiations over the state budget.
Madigan’s plan would drop the rate to 3.5 percent on business profits and backdate it to Jan. 1, a move that would cost the state about $1.5 billion in revenue over the course of a year. While the revenue loss could exacerbate the stability of Illinois government finances, it also tests the long-touted Republican theory that the Illinois economy will flourish and tax revenues will rise if the state’s taxes could be lowered.
Even if Madigan’s proposal doesn’t pass, the current corporate income tax rate of 7 percent is scheduled to drop to 5.25 percent in January 2015. The rate had been 4.8 percent prior to the Democratic-enacted tax increase in 2011.
Magnifying the financial impact of Madigan’s proposal is the already scheduled reduction in state income taxes in January 2015. Those reductions were expected to cost the state treasury about $5 billion over a full budget year. Quinn has declined to say whether the tax rates should be extended as part of an effort to deal with the state’s financial problems. While Madigan’s plan would not affect the personal income tax rate, it would drop corporate taxes below what had already been scheduled.
A second tax on Illinois businesses, known as the personal property replacement tax, would stay at 2.5 percent, meaning the total rate effectively would be 6 percent. But Madigan maintained the newly proposed overall rate would put Illinois in line with or below surrounding states.
The business tax-cut proposal comes at a time when Democrats have been gearing up to consider a Quinn-backed plan to boost the state’s $8.25 an hour minimum wage to $10 — something businesses and many Republicans have sharply opposed.
Several Democrats also have sponsored a proposed state constitutional amendment to move Illinois from a flat income tax to one which levies a higher percentage on higher earnings, though it’s unknown if such a plan has the votes in the legislature to make it to the November ballot.
Last month, Madigan rejected a package of state-backed incentives for big businesses, including Decatur-based Archer Daniels Midland, which threatened to move its main office out of state without them. In the end, ADM agreed to move its global headquarters to Chicago, but the relocation was downsized.
At the time, Madigan said there needed to be a deeper examination of what needs to be done to level the playing field for Illinois as it competes with other states. Madigan’s latest proposal is expected to emerge as a central part of that discussion, but Republicans suggested Democrats led by the speaker and Senate President John Cullerton, D-Chicago, are just looking for political cover. Cullerton provided no hints, issuing a statement saying only that the Madigan plan is under review.
Business leaders welcomed the move by Madigan, but they also wanted to see the details.
“It is still early in the legislative session, and we’re evaluating all proposals. We are certainly interested in reforms that would make our state more competitive for job growth and investment,” said Lisa Miller, a spokeswoman for Peoria-based Caterpillar Inc. Caterpillar CEO Doug Oberhelman has criticized state tax and business policies that he said were making it harder for the company to remain in Illinois.
Madigan’s proposal would affect only firms that pay the state’s corporate income tax and state Revenue Department statistics show that only one third of corporations pay the levy. Some firms use other methods that pass profits through partnerships which are then taxed at the lower individual rate.
Madigan’s plan also would affect few small businesses, which traditionally drive employment growth, since many file as partnerships using the individual income-tax rate.
Rep. David Harris of Arlington Heights, the GOP’s ranking member of the House Revenue Committee, contended Madigan was posturing because he provided only “half a loaf. He’s got to tell the people of the state of Illinois what kind of services are going to be reduced when you take away that kind of revenue.”
“I absolutely believe that lower taxes will make Illinois competitive and spur the economy,” Harris said. “But it’s not going to happen in one year.”
Details were less important to the Republican candidates for governor.
“This is more proof that the Pat Quinn tax hikes were a horrible mistake,” said Bruce Rauner, a wealthy businessman from Winnetka. “But this is only a baby step towards correcting the failures of the last four years. We need to start by getting rid of the entire Quinn tax hike and work to lower both corporate and personal taxes, putting more money back into the pockets of all Illinoisans.”
Treasurer Dan Rutherford, who is running for governor, said he was glad to see Madigan wants to reduce the corporate tax because “putting Illinoisans back to work must be a top priority — as is improving our business climate.”
Similarly, Sen. Bill Brady, a Bloomington Republican who narrowly lost to Quinn in 2010, said he was “glad to hear the speaker talking about a tax cut rather than a tax increase. I believe his effort to create a better jobs climate in Illinois would be even better served if he included a cut in the personal income tax rate, which would benefit small businesses as well as Illinois families.”
The plan drew immediate support from the Illinois Manufacturers’ Association.
“This is a significant step forward,” said the group’s vice president Mark Denzler, who added Madigan recognized the importance of helping business in Illinois.
Denzler said he believes cutting the corporate tax rate will result in other tax revenue in the state going up. He said it will help make Illinois competitive with other states that are wooing business, such as Florida and Texas.
But a key small-business group delivered more tepid praise.
“Unfortunately about 75% of small businesses, the true job creators, pay the personal income tax and not the corporate income tax,” said Kim Clarke Maisch, the state director of the National Federation of Independent Business. “So while this is good for one-fourth of the businesses in Illinois, it does nothing to reduce the tax burden of the vast majority of small business owners in Illinois.”
Tribune reporters Michelle Manchir, Maura Zurick and Hal Dardick contributed.