Governor Proposes to "Cut Corporate Loopholes"
The Following Information has been provided courtesy of Keith Staats, Executive Director of the Illinois Chamber Tax Institute, and was originally published in the Tax Institute's member newsletter. Keith's content is provided weekly to Tax Institute members.
As you may have seen in Crain's Chicago Business, the Governor announced some limited details of the budget he plans to propose for Fiscal Year 2022 beginning on July 1, 2021. According to the announcement, the Governor does not plan to impose an income tax rate hike. He proposes to "balance" the budget for the upcoming fiscal year through increasing taxes on businesses by, among other things, eliminating so-called "corporate loopholes" worth $900 million per year.
The Governor has not provided any details about the so-called "loopholes" that he plans to eliminate. I reached out to the Department of Revenue, but they did not provide any specific details. I also reached out to the Governor's Office of Management and Budget to see if they are willing to share any additional details, but my contact declined to discuss any details in advance of the Governor's upcoming budget address.
As you know, during the lame duck session, the Governor supported legislation, SB 1199 which would have decoupled from the impact of changes to federal net operating losses on individuals made under the federal Cares Act. This proposal was touted to be worth during debate in the House either $500 million or $1 billion.
I have been perplexed about the fiscal impact assigned to decoupling. From what I have been able to gather from conversations with the Department, the Department of Revenue asserts that decoupling from the federal net operating loss provisions as applied to individuals under the Cares Act could be worth up to a bit over $500 million. The higher number apparently also takes into account decoupling from the CARES Act provisions that suspended the limitations on excess business losses. Those numbers seem high to me.
I understand that there will be another attempt at decoupling. I don't know whether the $900 amount announced by the Governor includes the decoupling. I would note that there may also be other provisions of the federal Cares Act from which they might propose decoupling.
I can speculate about what might be components of the $900 million in so-called loophole closing.
The Illinois Comptroller publishes what is known as the Tax Expenditure Report. The Tax Expenditure report is an annual listing of the impact (cost) of every tax exemption, deduction and credit on tax revenues. I've linked the most recent version of the Tax Expenditure Report. As you will note from the first pie chart at page 6 of the report, only about 20% of the tax exemptions, credits and deductions are provided to business. Over 80% are provided to individuals and charitable organizations.
The biggest so-called "tax expenditure" provided to businesses is the Illinois net operating loss deduction, which was worth $421 million in FY 2018 - the last year for which numbers are publicly available. You will recall that Illinois suspended the use of net operating losses a few years ago at the time of the Great Recession. The use of Illinois net losses could be suspended again. This would provide a one year boost in state revenues, or longer depending on the period of the suspension. Any attempt to wipe out existing net operating losses, rather than suspending net operating losses would be subject to a successful legal challenge, in my estimation. Suspension of Illinois net operating losses would be an interest-free loan to state by Illinois businesses.
While it does not appear in the Tax Expenditure report because it isn't a credit, deduction or exemption, currently through a quirk of bad drafting, Illinois follows federal law and allows immediate expensing of capital purchases. Illinois could decouple from federal treatment, and go to straight line depreciation. This wouldn't make a difference in state revenues in the long term - it just spreads the expense over the useful life of the item purchased and placed in service, but it would have an impact on next year's state tax revenues. It would also have a negative impact on Illinois businesses by increasing their Illinois income taxes this year. Essentially, it would also be a loan to the state by Illinois businesses.
In FY18, the manufacturing machinery and equipment exemption was worth $141 million. It is worth more than that currently because of expansion of the exemption to include production-related tangible personal property formerly included under the expired Manufacturers' Purchase Credit. The Governor could attempt to eliminate the credit in it's entirety, or perhaps eliminate the expansion to production-related tangible personal property. In either case, this would make Illinois a less desirable location in which to expand or continue manufacturing.
The retailers' discount under the sales and use taxes was worth $128 million in FY 18. They could propose elimination of the discount. However, my guess is that they would propose to cap the discount. I doubt they would propose to completely eliminate the discount because under the recently effective Leveling the Playing Field sales tax legislation, remote retailers use their vendor discount to pay the companies that they use to determine which sales tax rate applies under the destination-based sourcing regime established under that Act.
The EDGE credit at $82 million and the research and development credit at $35 million could also be on the chopping block. Finally, they could also eliminate the High Impact Business and Enterprise Zone building materials exemptions.
In addition, the Governor could propose suspension or elimination of the data center exemption.
Even though we don't have the details, we need to be ready when the details are made public to refute the arguments that these are "loopholes."
HB 3653 Concerns: Trespassing on Private Property Provision
The Illinois Chamber would like to alert members regarding our concern with provision within HB3653, the criminal justice reform legislation passed last month during the lame duck session.
Why Illinois citizens should be concerned about HB 3653
There is language in the bill that will endanger our communities and make citizens in towns and cities of every size feel less safe. For example, if this bill is signed:
If you call the police because an unwanted person is peeking in your windows or standing in your yard or place of business and you don’t want them there for a legitimate reason, you can call the police, but the police will not be able to physically remove that person. All they can do is issue a citation (like a traffic ticket). Then, if the unwanted person still doesn’t leave and is not being threatening, the police will have no authority to arrest them or get them to “move along.” This applies to all Class B and Class C misdemeanors. Page 326.
Here at the Chamber, our ultimate concern is that businesses will no longer be able to remove trespassing individuals disruptive to operations. Whether that be our refineries, factories, financial centers, or local restaurants. It is imperative that businesses of all sizes and sectors have the ability to remove uncooperative or unwanted persons, whether they be protestors, dissatisfied customers, or politically-motivated actors.
If you have any concerns or questions regarding this provision within HB 3653 please contact us at email@example.com