After hiking taxes, Illinois now considers easing them

What a state takes away, it also can give back.

Less than a year after raising personal and corporate income taxes, Illinois officials are pushing a $250 million package of tax breaks for several prominent businesses threatening to leave the state, including retail giant Sears and the 163-year-old Chicago Mercantile Exchange, which was considering a move to Indiana.

To make the measure more palatable, individual taxpayers also would get a dollop of relief.

The measure suffered a setback Tuesday when the House rejected it, but legislative leaders said they were determined to reach a deal in the coming days or weeks.

The idea of giving tax breaks to companies is a hard sell in the state Legislature when many families are struggling and the Occupy Wall Street movement is reflecting anger at corporate interests. But advocates say if Illinois doesn't take action, the businesses and their thousands of jobs will be lured away by states that are eager to take advantage.

"If we don't do it, another state will. That's the reality of the world in which we live," said Rep. John Bradley, a Democrat who is chairman of the Illinois House Revenue Committee.

The Senate approved the proposal Tuesday in a special session, but the House balked, sending lawmakers into further negotiations.

"We are prepared to come back as soon as there is an agreement, as soon as we are able to work this out," said Bradley, who has overseen negotiations. "Unfortunately, that day is not today. Whether it's tomorrow or the next day or next week, we are prepared to come back as soon as this is settled."

Illinois' tax dilemma is a collision between two different goals: Balancing the budget and avoiding the image of a state that's bad for business. And in the process, officials want to avoid being exploited by companies making threats, perhaps empty ones, to flee Illinois.

When 2011 began, the state faced a deficit projected to hit $15 billion. The Democratic governor and Democratic majorities in the Legislature decided an income tax increase had to be part of the response to that gap.

They bumped the individual tax rate to 5 percent, up from 3 percent originally, and the corporate rate to 7 percent, from 4.8 percent. The increase, most of which is temporary and will expire in stages over the next 15 years, is supposed to generate about $6.8 billion in its first year.

Other states pounced. New Jersey, Indiana, Wisconsin and more began promoting themselves to Illinois businesses. They succeeded in drawing some companies away, despite protestations from Illinois officials that the state still has a low overall tax burden.

In the months since then, the same Democratic governor and Democratic legislators have passed measures to cut business costs for workers' compensation and unemployment insurance costs. Now the package of tax breaks is on the table.

Doug Whitley, president of the Illinois Chamber of Commerce, sees the proposal as acknowledgement that officials went too far with the January tax increase.

"They overreached," Whitley said. "They're trying to bring the pendulum back to a more middle ground and they're trying to send a strong message to employers that elected officials are not oblivious to their outcry."

The tax package would renew a $15 million income tax credit and a break on local property taxes for Sears Holdings Corp., which has its headquarters in the Chicago suburbs.

The proposal also cuts income taxes about $85 million for CME Group Inc. and CBOE Holdings Inc., which run the Chicago Mercantile Exchange and the Chicago Board Options Exchange.

The companies complain that they are still taxed on every transaction they handle, as if all business is still conducted by shouting men on trading floors, when most of their trades are now done electronically by buyers and sellers who have no connection to Illinois. The legislation being discussed would tax the exchanges on only 27.54 percent of their revenues.

Some legislators question whether Sears, CME and CBOE would really uproot their operations and leave Illinois. They worry that giving the companies what they want will encourage similar demands from other businesses.

"What's going to stop the next big company from putting a gun to our head with the same type of threat?" said Rep. Mary Flowers, a Chicago Democrat.

The package includes a raft of tax breaks that apply to Illinois businesses in general: renewing a research-and-development credit, changing the way losses can be applied to tax bills, exempting more assets from the estate tax and extending a variety of existing credits for five more years.

Families would get a little help, too — roughly $110 million in tax relief.

The standard personal exemption on income taxes, now $2,000, would be bumped to $2,050 and then increase with the rate of inflation in future years. The state version of the earned-income tax credit for poor families would rise to 10 percent of the federal credit, up from 5 percent.

Gov. Pat Quinn's office denies the package is a response to the earlier tax increase.

His spokeswoman, Brooke Anderson, said that despite headlines about the effect of the increase, Illinois is still adding jobs and ranks highly in some assessments of the best places to do business. She said the tax package is about making the state's system fairer for everyone.

More than 30 states have raised taxes since the recession began, said Jon Shure, director of state fiscal strategy at the Center on Budget and Policy Priorities. Some of those have gone on to offer tax breaks to businesses, but Shure said he sees no evidence of a direct link. That is, states don't seem to be cutting business taxes out of a sense that they were wrong to raise taxes in the first place.

Shure said cutting state business taxes doesn't help create jobs, but it can suck money away from education, infrastructure and other important state obligations.

"If you cut taxes to address the political perception that it creates jobs, what you've really done is take money away from the things that really do create jobs," Shure said. "In the long run it's detrimental to economic recovery."