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Rauner, Pritzker tax disclosures rich in avoidance

By Bob Secter October 21, 2018
Kiannah Sepeda-Miller
By Kiannah Sepeda-Miller October 21, 2018

Republican Gov. Bruce Rauner turns 62 next year and by summer will theoretically become eligible to collect Social Security benefits. Yet the bare-bones annual tax disclosures Rauner has made since entering politics show he frequently pays no Social Security or Medicare tax and in other years pays nothing for that close to what his multi-million dollar income might suggest.

J.B. Pritzker, Rauner’s Democratic challenger in next month’s election, is even richer than the incumbent. But his skimpy tax disclosures omit mention of a significant portion of the income sources at his disposal. Pritzker, a prominent philanthropist, also funds much of his gift giving with money that has escaped taxation, the Better Government Association reported earlier this year.

On track to spend their way into campaign record books, Illinois’ two deep-pocketed candidates recently presented voters with another fig leaf of transparency about how they are doing it.

Rauner and Pritzker both released the two-page cover sheets to their 2017 tax returns but, as with past disclosures, declined to release attachments that form the heart of those returns and could shed meaningful light on potential conflicts or how they maximize personal fortunes.

The bottom line detail from their recent tax disclosures, then, was remarkably unremarkable. "J.B. Pritzker and Bruce Rauner still rich," the Sun-Times declared in a droll headline.

That said, the limited releases, coupled with other publicly available documents, paint a portrait of the men who would collect and manage your state tax dollars as practitioners of aggressive tax avoidance, albeit in different ways.

A different tax world

It’s important to note that tax avoidance is not illegal and distinct from tax evasion, although some wealthy filers do push it to the edge and beyond. A recent New York Times investigation of President Donald Trump and his developer father concluded both had engaged in years of fraud to slash tax burdens by hundreds of millions of dollars.

In the current election battle, Rauner has played off a report by the Cook County Inspector General to accuse Pritzker of fraudulently obtaining $330,000 in property tax breaks on a Gold Coast mansion the Democrat owns. Pritzker denies any wrongdoing.

When it comes to the income tax, however, the rules are more straightforward for wage-earners of more modest means than the multi-millionaire Rauner or billionaire Pritzker.

But Jon Davis, a University of Illinois at Urbana-Champaign accounting professor who directs that school’s Institute of Government & Public Affairs, said federal tax law includes a variety of built-in incentives to encourage business investment. And those incentives, Davis explained, give the wealthy leverage to reduce income tax bills.

"Their tax world is very different from the world that you and I might face," he said.

There is no law requiring candidates and officeholders to disclose their taxes, though it has been common in recent decades for those seeking high office to fully reveal their returns. The most prominent exception is Trump, who refuses to make any of his returns public.

Rauner and Pritzker have each gone further since entering politics, but not much. Neither campaign responded to questions we posed about their tax filings, rendering it impossible to get clarity about details that likely could be explained if the candidates did not keep their complete returns under wraps.

For example, Rauner, a long-time private equity investor, has released federal Form 1040 cover sheets dating back to 2010 and on none does he report earning any business income, taxable at the rate of 35 percent.

For all but one of the eight years of Rauner’s disclosures, he also reports multi-million dollar losses in the income category that might include earnings from partnerships such as the GTCR private equity firm he ran for years and with which he still holds significant investments. Such income, if in positive territory, could have been taxed before this year at a tax rate as high as 39 percent.

For 2017 alone, the loss reported by Rauner for that category exceeded $17 million.

On the flip side, however, Rauner consistently reports robust capital gains taxed at lower rates. In 2017, two-thirds of the nearly $53 million in adjusted gross income Rauner disclosed came from capital gains, which is taxed at just under 24 percent.

For 2015, Rauner’s first year as governor, he reported more than $188 million in adjusted gross income, 90 percent of which was preferentially taxed capital gains.

Pritzker, a venture capital investor and heir to the Hyatt Hotels fortune, has a net worth estimated by Forbes magazine at $3.2 billion. He has released four years of tax summaries dating to 2014, and, on paper, despite all of Pritzker’s wealth, those documents appear to show he makes less than Rauner.

On their own, the summaries released by Pritzker also indicate he pays a greater share of his income in taxes than does Rauner.

But any comparison between the tax pictures of the two candidates comes with a big caveat. Pritzker’s disclosures cover just a sliver of the income at his disposal, much of which is held in trusts. In total, the Chicago Tribune has uncovered 35 offshore and domestic trusts and shell companies linked to Pritzker, in addition to a dozen offshore investment funds.

Last year, Pritzker’s campaign released a statement totaling the amount of federal and state taxes paid by his trusts between 2014 and 2016. But without supporting materials, there’s no way to put those figures in any context.

For his non-trust tax disclosures, Pritzker reported a little over $3 million in adjusted gross income for 2014, a figure that rose to nearly $15 million in 2016 and $41 million in 2017 — the same year he contributed more than $42 million to his campaign. It’s not clear from his filing which pot of money the campaign cash derived from.

Unlike Rauner, Pritzker does report millions of dollars of higher taxed business income as well as income in the high-taxed category that includes real estate and partnerships. And, each year he reports little in the way of preferentially taxed capital gains.

A consequence of that is that Pritzker most years reports paying a higher effective tax rate than Rauner — 36 percent in 2017 to Rauner’s 26 percent.

Another sharp difference involves a tax category called self-employment tax, a substitute for Social Security and Medicare taxes paid by filers who don’t have regular paychecks.

Rauner’s returns show he paid no self-employment tax in 2015 and 2016, years in which he collectively reported nearly $279 million in adjusted gross income. In 2014, Rauner paid just $152 and last year just under $20,000.

Pritzker paid more than $90,000 in self-employment tax in 2014, nearly $83,000 in 2015, more than $60,000 in 2016 and more than $96,000 in 2017.

Tax lawyer Steven Rosenthal, a senior fellow at the Tax Policy Center of the Urban Institute and Brookings Institution, said the discrepancy may be related to all those capital gains Rauner reports because private equity managers often reroute earnings as capital gains to avoid high tax situations. Capital gains income is not subject to self-employment taxes.

The IRS has recently begun cracking down on investors in limited liability corporations such as those in private equity for underreporting income subject to Social Security and Medicare tax.

A 2016 study by the federal agency estimated such underreporting had cost the two financially struggling entitlement programs for retirees $65 billion between 2008 and 2010 alone.

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Our Sources

"Pritzker’s Storied Charity Costs Him Little But Taxpayers A Lot," Better Government Association, Feb. 8, 2018

"Illinois Becomes the Plaything of the Rich," Better Government Association, July 26, 2018

"J.B. Pritzker and Bruce Rauner still rich, tax returns show," Chicago Sun-Times, Oct. 16, 2018

"Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father," New York Times, Oct. 2, 2018

"Game of thrones? Watchdog sees ‘scheme to defraud’ in Pritzker toilet tax break," Chicago Sun-Times, Oct. 1, 2018

Phone interview: Jon Davis, interim director of the Institute of Government & Public Affairs at the University of Illinois, Oct. 18, 2018

"Rauner, Pritzker shun transparency even when it might help," PolitiFact Illinois, July 22, 2018

1040 Forms: Bruce Rauner, 2010-2017

Forbes 400 Net Worth List, accessed Oct. 19, 2018

1040 Forms: J.B. Pritzker, 2014-2017

"Where's Pritzker's campaign cash coming from? He's keeping that a secret," Chicago Tribune, Oct. 10, 2018

Campaign Contribution Search: J.B. Pritzker, Illinois State Board of Elections, accessed Oct. 19, 2018

Phone interview: Steven Rosenthal, senior fellow at the Urban Institute & Brookings Institution Tax Policy Center, Oct. 19, 2018

"IRS pursuing self-employment taxes from LLC members," Journal of Accountancy, May 1, 2018

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Rauner, Pritzker tax disclosures rich in avoidance