Sales Tax Rebates and Access to Information
The State of Illinois disburses 16 percent of sales tax revenues from general merchandise back to the municipal government where the sale took place. In 2010, northeastern Illinois municipalities received nearly $1 billion in these disbursements, not including additional revenues from "local option" sales taxes like the incremental rates imposed by Cook County, the City of Chicago, and many other suburban municipalities.
The sales tax was highlighted by GO TO 2040 as a priority policy issue, given its direct link to local retail development decisions and the overall spatial pattern of the region. In January 2012, CMAP's Regional Tax Policy Task Force concluded in their report to the CMAP Board that the existing method of sales tax distribution contributes to extreme divergences in local tax capacity throughout the region. In 2010, state sales tax revenue collected by municipalities ranged from $.81 to nearly $7,000 per capita across northeastern Illinois.
Large sales tax generating businesses include malls and auto dealerships, which typically provide a much larger net fiscal return for municipalities than do offices and industrial-use developments. For an auto dealership, the local share of sales tax revenues can exceed ten times the local cost of servicing the establishment. This creates incentives for many local governments to orient their planning and economic development goals around these types of large retail establishments.
Other businesses such as call centers and other "order of acceptance" establishments can also generate high sales taxes, though they differ from the "bricks and mortar" types of establishment more commonly associated with retail. Since Illinois imposes and disburses the sales tax based on where the sales order is accepted (rather than where the buyer is located), these types of establishments can locate virtually anywhere and generate sales tax revenues for the local entity of their choosing. These establishments also have incentives to seek the "tax shelter" of lower sales tax rates outside of northeastern Illinois..
Given the promise of high fiscal returns, some municipalities in our region and elsewhere have the capacity to rebate a portion of the sales tax back to the retailer as an inducement to locate their business in that municipality. This often creates intense competition between local governments seeking to attract and retain these establishments. The Regional Tax Policy Task Force concluded that these intraregional moves from one community to another rarely result in new revenues or jobs for the region. Moreover, these tax rebate deals are not always disclosed to the taxpayer. To assess the impact on our region's economy, in March the CMAP Board recommended that the agency undertake an effort to quantify the magnitude of these rebates and other common economic development incentives.
The topic of sales tax rebates has also emerged in recent litigation filed by the Regional Transportation Authority (RTA) and several other taxing bodies, alleging that sales tax rebates by the Villages of Channahon and Kankakee have prompted companies to establish so-called "sham offices" outside the RTA service area, resulting in the loss of sales tax revenue needed for operating the Chicago region's transit system.
The RTA has also moved forward with a legislative effort to increase the transparency of sales tax rebate agreements. House Bill 3859 would require municipalities to file reports with the Illinois Department of Revenue concerning sales tax rebate agreements. As introduced, thebill would require municipalities and counties to file these reports within 90 days for existing agreements and within 30 days after a new agreement is executed. CMAP supports this legislation, which provides increased transparency regarding how tax dollars are being spent, where these deals have taken place, and what the impact has been for taxpayers and the overall economy.
HB 3859 has passed the House Revenue and Finance Committee but has stalled for the time being on the House floor with several amendments pending. One amendment extends the deadline of these rebate reports and requires the Department of Revenue to redact any specific information about sales tax figures, the amount of sales tax collected, and the amount of sales tax rebated. Despite this proposal to enforce the withholding of information on the actual public dollars at stake, an amended HB 3859 could still increase transparency of these agreements. CMAP continues to urge the state and local governments to increase access to all available information on how taxpayer dollars are being spent in these efforts to spur local economic development.