Illinois and Its New EDGE
arlier this year, Illinois made national headlines as political battle lines were drawn over the State’s budgetary woes. Many called into question the State’s solvency, and some even predicted an unprecedented bankruptcy due to a lack of much-needed pension reform. As a result of the political and fiscal turmoil, Illinois’ Economic Development for a Growing Economy (EDGE) tax credit program was allowed to expire, and any hope for a renewal was shrouded in doubt.
With the new state budget that passed in September, EDGE was revived and revamped as a new program that is currently moving through the rulemaking process. This is a step in the right direction, as until recently, Illinois did not have a job creation incentive in place with which it could compete for economic development projects. Under the proposed rules, EDGE offers non-refundable tax credits against corporate income tax liability equal to the lesser of 1) up to 75% of the state income tax withholdings of new employees associated with the project, plus 10% of training costs, or 2) 100% of the state income tax withholdings of new employees associated with the project. However, the proposed rules utilize certain restrictions that make the calculation of the anticipated benefit more difficult than expected.
First, the maximum tax benefit to be received is based on whether the project is located in an “underserved area.” Underserved areas are determined by poverty rates, the number of households receiving SNAP assistance, unemployment rates, and the percentage of children participating in the Federal free or reduced-price meal program. Projects that locate in one of these areas may receive a credit of 75% of new employee tax withholdings plus the 10% training credit, whereas projects that do not locate in an underserved area may only receive 50% of new employee tax withholdings plus the 10% training credit. Depending on projected wages and net new job creation, it is expected that most jobs will not qualify for a 100% EDGE credit unless training expenses are much higher than expected of a typical project. Furthermore, many companies will not want to locate in an underserved area, which dramatically reduces the benefit potential of the program.
Additionally, some companies may not be able to fully realize the credits earned under the program. EDGE credits are awarded for a term of up to 10 years, and can be applied to 100% of a company’s tax liability; however, they are non-refundable, meaning any credits that exceed the tax liability in a given year are not returned to the company as a cash incentive. The program also does not have a carryforward provision, so companies that do not have state income tax liability in the current year cannot apply the credits in future tax years. Certain segments of the economy, for example, “pre-revenue” tech companies or other start-ups, are disproportionately affected by this policy as they often do not have any current or anticipated tax liability.
One of the most concerning provisions under the proposed rules is the restriction on a company’s ability to relocate and expand its operations within the state. The statute requires the Department to make a determination, after conferring with the municipality or county in which the business currently resides, as to whether that locality can “reasonably accommodate” the proposed expansion. The ambiguity surrounding what is a “reasonable accommodation” may lead to an appreciable amount of risk for companies that currently operate in the state. Our clients make location decisions based on many factors, not just the availability of land, the average wage paid to employees, or the tax and regulatory environment of the area. How will the company know what factors are taken into consideration by the Department, and how will the Department know whether those factors are even important to the company when making its determination?
Finally, EDGE credits are subject to substantial control provisions that can appreciably reduce their overall benefit, particularly for closely-held business organizations or family-owned companies. The statute excludes from the credit calculation any wages of a direct or indirect beneficiary of the company that holds more than 5% of the profits, equity, capital, or value of the business. It also excludes the wages of any child, grandchild, parent, or spouse of such person. While this is unlikely to affect larger companies – particularly those that are publicly traded – it can certainly reduce the anticipated benefit for a start-up company or family business.
Despite the issues outlined above, the Illinois EDGE program is a step in the right direction. Without the tools necessary to compete for new projects, Illinois would be left at a competitive disadvantage, particularly as compared to neighboring states such as Missouri, Kentucky, and Indiana. However, Illinois policymakers should consider the greater implications of the proposed rules and their potential effect on reducing or eliminating the benefit for small businesses, start-up companies, and existing business that may be evaluating opportunities for in-state expansion.
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