Report: Illinois Could Recover $1.3 Billion Lost to Corporate Tax Loopholes

Federal reforms have failed to address tax dodging, but Illinois can take their own action to close loopholes

Illinois PIRG Education Fund

Every year, corporations use complicated schemes to shift U.S. earnings to subsidiaries in offshore tax havens which helps them dodge both state and federal taxes. Reforms to end tax dodging in Illinois would reduce revenue loss by $1.3 billion, according to a new report called “A Simple Fix for a $17 Billion Loophole,” released today by Illinois PIRG Education Fund.

“When multinational businesses dodge millions in Illinois taxes, that money doesn’t come out of a hat. It means either means we have less money for public priorities like education or other taxpayers end up footing the bill,” said Abe Scarr, Illinois PIRG Education Fund Director. “Luckily, there are ways for Illinois to even the playing field, and recover more than $1.3 billion for critical services without raising rates.”

“A rational public budget has to start with the revenue base,” said Ralph Martire, Executive Director of the Center for Tax and Budget Accountability in Illinois. “This report shows how leaving important parts of the economy out of that base both makes government more regressive and makes it harder to support core public services. Fixing that should be a top priority.”

For years, some corporations that do business here in Illinois have dodged taxes by booking profits made in America to tax havens like the Cayman Islands, that levy little to no tax. The report, which was co-authored by Illinois PIRG Education Fund, the Institute on Taxation and Economic Policy (ITEP), SalesFactor.org and the American Sustainable Business Council (ASBC), looks at approaches Illinois can take to address this offshore tax dodging.

States have the power to use a global picture of a company’s activities in order to determine how many tax dollars a state rightfully should receive. A Simple Fix details how much money each state would recover if it required companies to follow one or more standard procedures, including domestic combined reporting, tax haven list reform and worldwide combined reporting — otherwise known as complete reporting.

Combined reporting (used already by 27 states and Washington, DC, including Illinois) applies a formula to the total domestic business of a company to determine how much income a company should attribute to the state, instead of letting the company decide unilaterally how to allocate its profits (which incentivizes shifting money to low-tax jurisdictions).

Complete reporting expands the combined reporting to include the company’s entire global business in order to close loopholes that allow corporations to hide profits offshore.

“Right now, responsible businesses pay their fair share of taxes, while others are allowed to dodge and avoid their fair share. That hurts everyone,” said John O’Neill of the American Sustainable Business Council, which has a member network representing 250,000 businesses. “Too many companies have abandoned their moral obligation to pay the full amount they owe for the public services and infrastructure they use in our states. That means other taxpayers, including other businesses, have to pay more.”

Closing loopholes that allow offshore tax dodging would lead to significant revenue gains for most states, totaling $17 billion across the country, as illustrated in the table below. By modernizing state tax codes with these simple reforms, Illinois would bring in $1.3 billion each year, level the playing field for local businesses that compete with multinational corporations, and protect honest taxpayers from picking up the tab for tax dodgers.