For Some Workers, Paying Income Taxes Means Paying Their Employers

For Some Workers, Paying Income Taxes Means Paying Their Employers
April 30, 2012

People may dislike paying income taxes but many at least take heart knowing their dollars support government services ranging from public schools to public safety. However, for some people, a portion of the state personal income taxes they see deducted from their paychecks doesn't support public services.

This is true for workers at more than 2,700 companies in 16 states. Nearly $700 million is getting diverted each year. And it is unlikely the affected workers are aware, given that no state requires the diversion be disclosed on pay stubs.

The money is going to the employers of those workers as a growing number of states divert income tax revenue to subsidize corporations. The practice of redirecting state personal income tax (PIT) deducted from paychecks means many workers are, in effect, paying taxes to their boss.

These are the findings of “Paying Taxes to the Boss,” a new report by Good Jobs First, a nonpartisan national policy research organization in Washington, DC. It is the first systematic examination of state economic development programs derived from withholding taxes and PIT revenue. Good Jobs First has identified 22 PIT-based programs in 16 states that together involve the annual diversion of about $684 million in revenue.

‘Piracy and Blackmail’

Many of the programs are entwined with “job piracy” and “job blackmail,” said Philip Mattera, research director of Good Jobs First and principal author of the report. Many PIT diversions are paying corporations to simply relocate existing jobs from one state to another. Others are used by states when they capitulate to companies that threaten to move to another state. 

The study authors recommend states consider abolishing PIT-based subsidies, or, short of that, requiring companies to disclose the details of how much money is going where on every pay stub of affected workers.

The report examines the following PIT-based subsidy programs:

  • Colorado: Job Growth Incentive Tax Credit
  • Connecticut: Job Creation Tax Credit
  • Georgia: Job Tax Credits
  • Georgia: Research and Development Tax Credit
  • Illinois: Economic Development for a Growing Economy (EDGE) Tax Credit
  • Indiana: Economic Development for a Growing Economy (EDGE) Tax Credit
  • Kansas: Promoting Employment Across Kansas (PEAK) Program
  • Kentucky: Kentucky Business Investment (KBI) Program
  • Kentucky: Kentucky Industrial Revitalization Act (KIRA)
  • Maine: Employment TIF (ETIF)
  • Maine: Shipbuilding Facility Credit
  • Mississippi: Impact Withholding Rebate Program/Existing Industry Withholding Rebate Program
  • Mississippi: Mississippi Advantage Jobs Incentive Program
  • Missouri: Quality Jobs Program
  • Missouri: The Missouri Automotive Manufacturing Jobs Act
  • New Jersey: Business Employment Incentive Program (BEIP)
  • New Mexico: High Wage Jobs Tax Credit
  • North Carolina: Job Development Investment Grants (JDIG)
  • Ohio: Job Creation Tax Credit
  • Ohio: Job Retention Tax Credit
  • South Carolina: Job Development Credits
  • Utah: Economic Development TIF (EDTIF)

The programs work in various ways. Some allow employers to immediately retain (and never remit to the state) a large portion of the withholding taxes generated by designated new or retained workers. Some provide cash rebates or grants calculated the same way. Others provide credits against corporate income taxes or other business levies, with the value of those credits derived from the withholding taxes of new or retained workers. (Some of these credits are cash-refundable if the credit exceeds the company's tax liability.)

100 Percent Diversions

The share of withholding taxes diverted into subsidies can be as high as 100 percent, as is the case with programs such as the EDGE tax credits in Illinois and Indiana, and the duration can be as long as 25 years, as is the case with Mississippi’s Withholding Rebates. A total of 12 programs divert 75 percent or more of withholding, and 18 provide 10 or more years of subsidies.

The most expensive program is New Jersey’s BEIP, which in FY2011 approved new grants worth up to $73.2 million over their multi-year terms and disbursed $178 million during the year for previously approved contracts. Among states with subsidy recipient disclosure, those with the largest number of participants in PIT-based programs are: Ohio (567), Kentucky (509), Illinois (315), New Jersey (306) and Indiana (283).

‘Economic War Among States’

The report highlights how such programs fuel the “economic war among the states” and “job blackmail.” For example, Kansas gave AMC Entertainment $47 million in PEAK subsidies last year to get the movie theatre chain to move its headquarters from downtown Kansas City, Missouri about 10 miles across the state line to suburban Leawood.

In Illinois, Motorola Mobility (now part of Google) last year persuaded state officials to provide $100 million in EDGE tax credits over 10 years to keep its headquarters in a Chicago suburb.

Moreover, these were newly enhanced EDGE benefits, meaning the company may immediately keep employee withholding taxes rather than crediting them against its state corporate income tax liability.

Also late last year, Illinois’ governor and legislators gave Sears Holdings a 10-year, $150 million conventional EDGE deal to keep the retailer’s headquarters in another Chicago suburb. It was the second massive “job blackmail” package for Sears; the retailer had already been receiving big state and local tax subsidies since first threatening to leave the state in 1989.

Greg LeRoy (goodjobs@goodjobsfirst.org) is executive director of Good Jobs First, a nonpartisan national policy research organization in Washington, DC.

Internet Info

“Paying Taxes to the Boss,” Good Jobs First: http://www.goodjobsfirst.org/taxestotheboss