Happy New Year from the Illinois Chamber. New Year means a new legislative session. It's often difficult to precisely predict what members of the Illinois General Assembly will push. However, given that 2018 is home to an election year, expect plenty of politically charged issues to be brought before the Illinois legislature.
Here is a sneak peek of what the Illinois Chamber will be on the lookout for in the New Year (for better and for worse).
1. Graduated income tax.
Currently, the Illinois income tax must be imposed at a flat rate. Since the legislature gave us a 32% income tax increase over the 2017 July 4
holiday, the rates for individuals increased to 4.95% (up from 3.75%) and 7% for corporations (up from 5.25%).
The flat rate of income tax ratio is mandated by the Illinois Constitution (
Art. IX Sec. 3
). The Constitution also requires the rates between corporations and individuals must not exceed a ratio of 8 to 5. The intent of the drafters of the 1970 Constitution was to require a ratio to prevent the legislature (who adjusts the actual rates) from creating a large disparity between rates imposed on individuals and corporations (for example: 2% rate for individuals and a 30% rate for corporations).
Any change to the current structure requires an amendment to the Illinois Constitution. The process begins in the legislature where both houses must approve with a three-fifths majority to change the flat tax structure to a graduated structure. If approved by both houses, such a proposal would head to the voters for approval.
There have been graduated income tax proposals in the past but none were ever approved by the legislature. In 2014, SJRCA 1 (Harmon) would have authorized a graduated income tax for both individuals
corporations. This proposal also would have eliminated the 8 to 5 ratio between individuals and corporations.
Contrary to assertions by proponents of a graduated income tax, there is nothing more inherently "fair" about a graduated rate structure. The current flat rate structure with limited deductions and credits ensures that the more you earn the more you pay. Eliminating the flat tax system would eliminate one of the current advantages that Illinois has over many states with which Illinois competes. A graduated rate structure would likely have an adverse effect on Illinois employers, including the many small and medium size businesses that operate as pass through entities. And lastly, if the flat rate structure and the 8 to 5 ratio is removed, nothing would prevent the legislature from imposing high tax rates on corporations.
It seems unlikely that such a proposal would pass the legislature given the makeup in the House. However, still expect an effort to push for a graduated income tax this spring as constitutional amendments are always more likely to be debated in even-numbered years when a statewide election takes place. Expect final action on all constitutional amendments to be wrapped up by early May.
2. Service tax. Remember the battle from 2017? If introduced again and enacted, these taxes would have a devastating impact on many Chamber members. You may recall during the SB 9 debate last year there were several services that were taxed under various proposals. Previous versions contained a new Video Service Tax Modernization which would have imposed a tax of 5% on direct-to-home satellite service, direct broadcast satellite service, and digital audio-visual works to subscribers. Previous versions also included a new 1% entertainment tax on the charges paid for entertainment services such as Netflix. Previous versions also included taxes on storage (including parking), laundry, dry-cleaning, cloth pressing, private detective services, structural pest control, tattoo and body piercing.
Expanding the sales tax base to include services would not generate enough revenue to balance the budget, especially if business-to-business transactions are exempted to avoid tax pyramiding. In addition, picking and choosing services to tax raises legal issues. As a legal matter you can't simply plop a list of services into the retailers' occupation tax.
There may not be a great appetite in an election year to adopt service taxes but it wouldn't surprise many if the idea gets tossed around to increase state revenues.
In an election year, expect a renewed push to increase the state's minimum wage. We've seen similar attempts in previous election years such as 2014 when the legislature approved a non-binding referendum question asking voters if the rate should be increased to $10 per hour. In 2017, we saw two minimum wage proposals. One would incrementally increase the rate statewide to $11 and the other would have risen the rate to $15 per hour for those over 18 and $13 per hour for those under 18. The $15 per hour version made it to the Governor's desk where it was vetoed. Given the lack of support to override the veto, the bill died during veto session. This is another case where it is unlikely to become law since there was a concerted effort last year to pass an increase and fell short. If they had the votes they would have overridden the Governor's veto last year. But again, it's an election year and the powers that be love to keep this this issue alive to mobilize its proponents.
Internet, website regulations.
Within the last year, the Illinois General Assembly has seen a high amount of introduced regulations aimed at engineering an expansion of liability for website operators and technology startups. Special interest groups are pursuing data privacy legislation in the name of consumer protection with aspirations of striking it rich. The unfortunate reality of data breaches becoming more commonplace have given the proponents of these pieces of legislation the fodder to push their agenda at the Illinois Statehouse. Expect a renewed push by trial lawyers to expand the liability on businesses operating on the internet. Putting litigation over innovation.
20% gross receipts tax on investment management services. Democratic gubernatorial candidate and state Senator Daniel Biss (D - Evanston) has already made it a campaign pledge to impose a new 500% tax increase on Illinois' vital financial service sector if elected. Illinois has benefited from being a top ten globally-recognized financial hub. Such a tax would hurt our state's global reputation and would force investors to look to less hostile cities such as Boston, Dallas, and Charlotte. In addition to being poor public policy, such a proposal is also likely unconstitutional on a number of grounds.
If Illinois taxes on such income were to increase, this form of private investment would shrink, and many Illinois businesses would lose access to capital and expertise. The Chamber was successful in defeating Biss' proposals last year (SB 1719) but expect a renewed push this year.
Capital infrastructure plan. Details are scare but it sounds like that big federal bill will be announced later this month. It is likely that it will try to leverage as much money as possible-$200 billion to finance $800 billion-but how that works and what the state/local match will be remain up in the air. That last part is key as if there is a strong state requirement it could force states such as Illinois to pass state infrastructure programs. If a federal program becomes law, it may force Illinois' hand.
Recreational cannabis. Both Senate and House sponsors have publicly indicated their desire to seek a new revenue source for the State by legalizing and taxing recreational marijuana in 2018. Several subject matter hearings have been conducted that reinforce this notion. Social media ads have also surfaced from a downstate Republican showing his willingness to be at the table to negotiate a bipartisan bill. In 2016, the state of Oregon collected more than $60 million in new revenue from a tax on marijuana - more than six times what the Oregon Liquor Control Commission expected for the 2015-2017 budget period. In Colorado, which legalized marijuana in 2012, the state collected more than $140 million in 2016 from taxes on legal marijuana sales. Given the financial status of the state, many lawmakers view this as money sitting on the sideline that ought to be taxed. However, any bill that moves through the process must have strong protections for employers' ability to maintain a drug-free workplace.
Budget stalemate 2.0? Last year gave end to a more than two year budget stalemate. But that budget will expire, forcing lawmakers to come up with a new spending plan. The Governor has already indicated in a tweet this week that any budget must be balanced or lawmakers' pay will be withheld. The interesting question is whether legislators will rebel again this year and adopt a budget resolution.
An attempt to roll back the 32% income tax increase.
Gov. Bruce Rauner also tweeted this week that one of his New Year's resolutions will be to roll back the 32% income tax increase that was passed last summer. In fact, this week Representative Charlie Meier introduced HB 4211, which would lower the tax rate to 3.75% for individuals and 5.25% for corporations for the years 2018 through 2025 and would further reduce the rate after 2025 to 3.25% for individuals and 4.8% for corporations.
However, given the powers that be in the legislature, such an attempt seems like a long shot. If the Governor's wishes are not granted expect this to be a major theme in the 2018 gubernatorial election.
Chamber economic development package to receive bi-partisan support.
In the coming weeks, the Illinois Chamber will be unveiling its 2018 legislative initiatives. A large portion of the initiatives will contain an economic development component that will be sure to win over both Republicans and Democrats. Keep your eye out for future updates and details.
All the above are predictions. This session could very well end up producing none of the above or could give birth to a new set of issues that are not listed. This list is a primer for what the Chamber will be looking for again in 2018. Stay tuned.