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Quinn Drives Exodus of Illinois Business, while Press Applauds

John Powers 17 February 2011 No Comment

Despite the massive tax hikes in Illinois, Pat Quinn and his auxiliary PR Men Eric Zorn and Rich Miller are ho-humming the ability of Illinois based corporations to locate out of State. Says Quinn (via the Zorn/Miller pitch)

The only way for the company to avoid paying Illinois corporate tax is for the company to cease selling their product to Illinoisans; relocating out of Illinois will have no effect on the amount of money paid by a company to the State of Illinois.

· A company that has $1 million in profits from $10 million in sales – $4 million of which was generated by sales in Illinois – will pay the same amount in income taxes ($28,000 under the 7% rate) whether they are located in Illinois, Wisconsin, Indiana, or even Montana.

Which must come as some surprise to the great number of business who are currently not paying taxes in Illinois, Amazon.com for example. Never fear, there’s a tax for that too, and the Tribune is cheering along the smack at affiliated merchants who use Amazon’s marketing tools to sell their goods in Illinois.

All good and well, lets start with the Chicago Tribune Kindle Edition and see how it goes for the Trib to pay up on the “simple fairness” of the State taking it’s 10% out of each electronic subscription to the its paper.
Aside from stifling technology companies, the real point of Quinn/Zorn/Miller’s demands were to limit the advantages of moving to Texas for example, to avoid the 7% corporate income tax. Reading carefully…

A company that has $1 million in profits from $10 million in sales – $4 million of which was generated by sales in Illinois – will pay the same amount in income taxes

Aha…a business pays taxes on profits, not on sales, something that even Pat Quinn may not realize (let alone Zorn or Miller). But how is profit calculated?

A sensible company will not recognize profits in a high tax state, rather the profits will move to a lower tax regime, or a no tax area such as Texas. 0% multiplied by any amount of profit is still $0.00. So investment in other states will be funded by revenues gained in Illinois, with the gross profits funding that investment and the net profits landing outside of the reach of the State of the Illinois. Corporate income tax is levied on Net Profits. When money is removed from a State, for whatever reason (franchise fees, licensing agreements etc), profit in that State is reduced.

The solution was to tax gross receipts rather than net profits, but Rod Blagojevich’s Gross Receipt Tax was stomped in the Illinois House, as it was very painful to everyone, not just Quinn/Zorn/Miller’s villain of the day.

Shifting profits seems to be a very aggressive practice to avoid taxes?  Would an Illinois business ever do such a thing? Well of course they would and one of our best corporate citizens, State Farm Insurance has been doing a bang-up job of avoid regulatory confiscation of their homeowner policy business in Florida by moving profits out of Florida to avoid Florida’s absurd hurricane coverage requirements. Read the whole story here, but the takeaway is, State Farm set up an company in Bermuda to provide homeowners insurance coverage in Florida. The profits go to Bermuda, and stay out of the hands of Florida’s State government.

Contrary to what Quinn (and Zorn and Miller) might believe, business tends to operate to make profit for its owners and not for the amusement of the State of Illinois. Sure, it’s all good fun for the State of Illinois to spend $200 Million on a hotel or for the State to pay for an early retirement program in the middle of a pension crisis, but it is not the responsibility of private business to pay for such cockeyed spending sprees. Business already pays property tax, gas tax, telephone tax, and withholding tax on every employee in the State of Illinois. Avoiding the income tax hike is not all that difficult, but as a result, investment in Illinois business will move elsewhere to environments less hostile to enterprise.

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John Powers is the President of the Chicago Daily Observer

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