Tax Analysts Blog

Illinois Lawsuit Challenges Tax Credit Program for Encouraging Job Retention

Posted on Jan 14, 2015

The Illinois Policy Institute recently filed a lawsuit to challenge a common practice at the state and local level: tying tax credits to the retention of jobs. The suit alleges that businesses should receive tax credits under the Edge Development for a Growing Economy (EDGE) program only if they create new jobs in the state, not if they retain them.

The EDGE program offers incentives to encourage companies to locate or expand their operations in the state when there is active consideration of a competing location in another state. If the business is eligible, the program provides tax credits equal to the amount of state income taxes withheld from the salaries of newly hired employees. In addition to locating or expanding in the state, businesses must agree to make an investment of $5 million in capital improvements and to create a minimum of 25 new full-time jobs. Small businesses, defined as those with 100 or fewer employees, must agree to make a capital investment of $1 million and create at least five new full-time jobs in the state.

But beyond those requirements, it has long been the practice of the Illinois Department of Commerce and Economic Opportunity (DECO) to award tax credits when businesses retain jobs. In fact, the Chicago Tribune reports that since 1999, the state has awarded nearly $1 billion in tax incentives to businesses under the EDGE program, the bulk of which was for jobs retained.

According to a press release, the intention of the legislature was to use the EDGE program “to attract new business to the state, or encourage existing businesses to expand and create new jobs,” but what has happened instead is that DECO has written a regulation allowing it “to issue credits to companies that do not create any new jobs in the state.” Jacob Huebert, an attorney for the Liberty Justice Center in Chicago, alleged that DECO is making “its own rules for awarding EDGE tax credits.”

While this raises a legal question, the lawsuit is unlikely to go anywhere. Unless the effect of the program is to raise taxes on out-of-state businesses (which is a constitutional issue), discretion is granted in the implementation of tax credits and incentives that encourage local investment or activity. DECO would likely argue that expansion of a business’s activity in the state requires the retention of jobs.

But the interesting question this lawsuit raises is whether job creation and job retention should be treated as equal for purposes of a tax credit. Most states would undoubtedly answer yes. That is because states are not only trying to encourage local investment and activity, but they are also trying to ensure that businesses don’t get lured away by another state. (This is the primary reason many states have permanent tax credit and incentive programs.)

Tax credits and incentives are often frowned upon by tax policy experts, but are seen as necessary by state and local governments. In good economic times and bad, state tax credits and incentives are available to corporate taxpayers. The reason is simple -- state and local governments are focused on creating jobs and encouraging investment within their borders. They must compete with surrounding states, most of whom also offer tax credits and incentives. Job creation and job retention are important goals for any state.

Those who frown on credits and incentives in general can take some reassurance in the fact that Illinois has taken steps to provide information about its programs. The state has an online database that provides information about the subsidies a business has received from the state’s major economic development programs. The database reveals not only the benefit received by the business, but the results for the state in terms of job creation and wages.

States should be held accountable when they are providing tax credits and incentives, but the Illinois Policy Institute lawsuit seems to be splitting hairs by focusing on job retention versus job creation.

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