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updated: 11/10/2011 9:42 AM

How lawmakers would pay for tax breaks for Sears, CME Group

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Associated Press

SPRINGFIELD -- When advocates for the needy and vulnerable wanted to stave off budget cuts earlier this year, they fought for a change in tax laws that would save Illinois hundreds of millions of dollars. Six months later, state leaders are giving the idea serious consideration -- as a way to pay for corporate tax breaks.

The change, known in Springfield shorthand as "decoupling," is part of a proposal to provide financial relief to keep Chicago financial exchanges and Sears from leaving the state. The roughly $500 million package, which Gov. Pat Quinn and legislative leaders were negotiating Tuesday, also would offer smaller forms of tax relief to businesses across Illinois and to the working poor.

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They're talking about paying for the package by changing state law so that Illinois doesn't offer a tax benefit created by federal law as an economic incentive. Decoupling from the federal incentive could save Illinois $570 million the first year.

The embrace of decoupling surprises the groups that fought for it in the spring.

"That revenue could have been used to prevent budget cuts that were made or to pay down some of the backlog of unpaid bills. Now what's being proposed is to do neither of those things," said Larry Joseph, director of a tax policy initiative at Voices for Illinois Children.

John Bouman, president of the Sargent Shriver Center on National Poverty Law, said what has changed is the timing and the stakes.

"We're getting closer to the election and we're getting threats made by part of the corporate sector. It's that kind of hardball," Bouman said.

The idea went nowhere in the spring largely because of opposition from business groups, which considered decoupling to be a tax increase. Lawmakers wanted nothing to do with anything labeled an increase so soon after raising income taxes.

Now, however, they're on board with the idea.

"Many in the business community believe it's a trade-off worth making in order to get tax relief they desperately need," said Patty Schuh, spokeswoman for Senate Republican Leader Christine Radogno, R-Lemont.

Here's how it works:

The federal government created a new economic incentive involving depreciation on major purchases. Basically, it let companies write off the full depreciation at once instead of doing it over several years. Because Illinois law is tied to the federal tax code, Illinois suddenly found itself offering the same tax break.

By decoupling from federal law, Illinois would no longer automatically offer that tax break. Illinois businesses would pay what they've always paid and do it on the same old schedule.

That would prevent a $570 million hit to state revenues this year and a $350 million hit next year.

Officials could then use that money to pay for the package of tax relief that Illinois businesses consider more valuable, including lower income taxes for Chicago's CME Group Inc., a break on withholding taxes for Sears Holdings Corp., research-and-development credits for companies around the state and tripling the earned-income tax credit for poor families.

CME Chairman Terry Duffy told lawmakers Tuesday that his company may not be able to stay in Illinois if it must pay income taxes on every transaction it handles, even when the buyers and sellers are in other states. He urged officials to tax only a portion of CME's transactions.

"We're not threatening anybody," he said at a hearing. "We like Chicago. We love Illinois. We want to remain a big part of it."

Human services groups don't necessarily oppose the new proposal to link decoupling to tax relief for businesses. But they do worry it will end up digging a deeper budget hole for other parts of government. That's because money from decoupling would run out in two years, while the tax breaks for business will continue for many years after that.

Quinn budget director David Vaught said he hopes economic growth spurred by the tax breaks will generate enough new revenue to fill the hole after those first two years.

Quinn, Senate President John Cullerton and some other Democrats backed the decoupling proposal in the spring, although it was never a top priority.

Cullerton spokeswoman Rikeesha Phelon said the change is a good way to pay for tax breaks to struggling businesses and poor families. But she acknowledged the seeming conflict of using the money this way when Illinois government owes billions in overdue bills and is on the verge of closing prisons and mental institutions.

"It's an odd picture right now," Phelon said.

As they began the second half of their fall session, lawmakers scrambled to study proposals, count votes and prepare legislation. That meant lots of activity but few major decisions.

The House Executive Committee approved a slimmed-down version of a major gambling expansion. In a bid to build a veto-proof majority, backers decided on a smaller increase in the size of casinos and slot machines at horse racing tracks. They also ruled out slots at Chicago airports. The bill would still allow five new casinos, including one in Chicago.

It passed 8-2 and now goes to the House floor, but further tinkering is likely before a vote.

Another House committee voted 5-4 for legislation meant to cut government pension costs. It would create new pension "tiers" and charge employees more money if they want to stay with their current benefit plan. Unions are fighting the legislation fiercely, and it faces a tough time on the House floor.

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