The General Assembly cancelled the fall veto session.

At this time, it does not appear that the General Assembly will return to Springfield before January possibly for a lame duck session prior to the swearing in of the new General Assembly on January 13, 2021.

As I discussed last week, the current fiscal year budget is out of balance by about $3,9 billion.

As I predicted last week, we are beginning to hear the usual chorus suggesting that the first step in addressing the budget deficit is to "cut corporate loopholes." But, here are the facts:

The Comptroller compiles an annual list of all state tax exemptions, credits and deductions. Here is a link to the entire report. The following is a list of all such exemptions, credits and deductions over $100 million for FY 2018 (the last fiscal year for which this information has been compiled):

$2.235 billion - Federally Taxed Retirement and Social Security

$1.865 billion - Food, Drugs and Medical Appliances

$989 million - Standard Exemption from the income tax

$589 million - Property Tax Credit

$435 million - sales to exempt organizations (charitable, etc.)

$421 million - net operating loss deduction

$313 million - earned income credit

$222 million - farm chemicals exemption

$215 million - trade-in credit

$141 million - manufacturing machinery and equipment

$139 million - other individual income tax exemptions

$138 million - biodiesel discount and exemption

$128 million - retailer's discount

$104 million - farm machinery and equipment

The Comptroller also compiles a list of "Economic Development Tax Expenditures" Tax Expenditures are government-speak for exemptions, credits and deductions. The largest of these under the corporate income tax are:

$82 million - EDGE credit

$44 million - Film Production Credit

$34.6 million - Research and Development Credit

$9.5 million - Enterprise Zone Investment Credit

$357 thousand - High Impact Business Dividend Subtraction

$165 thousand - River Edge Redevelopment Zone Credit

$147 thousand - Angel Investment credit

The largest of these under the sales taxes, after the manufacturing machinery and equipment exemption listed above, are:

$32 million - Enterprise Zone building materials exemption

$16.9 million - Designated tangible personal property within an Enterprise Zone

$12.7 million - High Impact Business Building Materials exemption

Because these are figures from FY 2018, the new Data Centers sales tax exemption is not included here.

You will notice that the big money in exemptions, credits and deductions, are those granted to individuals and charities - not to businesses. According to the Comptroller, 66/2% ($6.155 billion) are given to individuals, 5% ($456 million) to charities and 19.8% ($1.841 billion) to business, with another 9% in the "other" category.

Elimination of every exemption, credit and deduction given to business would not come close eliminating the budget deficit for the current fiscal year.

The biggest tax reductions are given to individuals - the retirement income exemption and the reduced sales tax rate on groceries and food and drugs. Illinois is one of only three states with an income tax that have such a broad exemption for retirement income. Many states exempt groceries and drugs and medical appliances. Illinois is one of only 3 states that imposes any type of sales tax on prescription drugs.

The biggest tax "reduction" given to businesses is the net operating loss deduction. As you know, Illinois restricted the use of Illinois net losses when it was attempting to address budget shortfalls during the Great Recession. To put things in perspective the number for FY 18 in the Comptroller's report likely is larger than it would be otherwise because it contains Illinois net losses that were suspended during the Great Recession. Illinois did not attempt wipe out Illinois net losses that had been incurred in tax years prior to the adoption of the legislation. The Department knew that they would have been unsuccessful in attempting to retroactively eliminate existing Illinois net losses.

The exemptions, credits and deductions granted to businesses are granted to businesses located throughout the state, both in Democratic and Republican legislative districts. It is important that we educate members of the General Assembly, and in particular the Democratic members of the General Assembly because those members tend more often to buy into the "cut corporate loopholes" rhetoric. I request the assistance of members in identifying the business tax incentives important to you, along with the location of the facilities. For example, if you claim the Illinois research and development credit, let me know the location at which those activities take place.

As I noted last week, we will likely see every ill-advised idea to increase state revenues by increasing the tax burden on the business community recycled. That will include eliminating the exemptions, credits and deductions outlined above, as well as other bad ideas. Here are some of the other ideas we will likely see:

1) Amending the Illinois Income Tax Act to decouple from immediate expensing. You will recall that Illinois has decoupled from federal accelerated depreciation, but the decoupling was drafted in such a way that 100% expensing at the federal level results in 100% expensing for Illinois income tax purposes. This provision could be amended to completely decouple from immediate expensing at the federal level. Of course, this just shifts money around between tax years.

2) Expand the sales tax base to tax additional services. The Center for Tax and Budget Accountability and the Taxpayers Federation issued a report in 2015 recommending that the sales tax base should be expanded to include services. At that time, they concluded that up to $2.1 billion in additional revenues could be raised from taxing a wide variety of consumer and business services. I remain skeptical of that number for two reasons.

First, the number is premised on the Illinois General Assembly passing legislation that would tax a huge number of business and personal services that are currently untaxed. The "political" viability of that type of a broad tax base expansion seems dubious to me.

Second, if you dig into the $2.1 billion projection, it is an FY 2014 projection that was based on updated projections from a 2011 study of the General Assembly's Commission on Government Forecasting and Accountability, which was itself based on updated projections from a study done some years earlier. In other words, the $2.1 billion projection is a projection from "updating" a projection updating a study done around 15 years ago.

Next, from a drafting standpoint I think there would be serious legal concerns with amending the Retailers' Occupation Tax - a tax on sales of tangible personal property - to expand the tax to include services. Drafting a new tax or taxes on services to run in parallel with the existing Retailers' Occupation Tax would also be a rather heavy lift.

3) Financial transactions tax - Representative Flowers has time and again proposed a state level financial transactions tax. HB 23 introduced in 2019 was her most recent legislation on this subject. You may recall that a similar tax was recently considered in New Jersey - which, ironically enough, resulted in a threat by the New York Stock Exchange to move their data operations from New Jersey to Illinois to avoid the tax. Despite the contentions of the proponents that such a tax would raise significant amounts of new tax revenue, all a state financial transactions tax would do is drive the industry from Illinois. The recent experience with proposed legislation in New Jersey should confirm this.

4) Change income tax apportionment from the single sales factor back to an equally weighted formula based on property, payroll and sales. This proposal has been pushed in the past by the Center for Tax and Budget Accountability. They have touted this in the past as a revenue raiser. The practical impact of such a change would be to tax companies with Illinois property and payroll more by giving them a higher Illinois apportionment percentage, while providing an Illinois income tax reduction to those companies with Illinois sales that do not have significant property and payroll in Illinois. Going back to a three factor apportionment formula would add one more reason why companies may not wish to add new facilities and employees in Illinois.

5) Amend the Illinois Income Tax Act to implement world-wide apportionment of income, or for those taxpayers opting to continue "waters-edge" apportionment require apportionment to Illinois of income attributable to certain so-called "tax havens.". This proposal, modeled on Montana law, introduced a couple of years ago SB 1115 and HB 2085 was promoted in a report by the Institute on Taxation and Economic Policy (ITEP) and promised vastly increased corporate income tax revenues. The ITEP fiscal estimates were based on a fundamental misunderstanding of the Illinois Income Tax Act. The types of tax shifting to foreign jurisdictions that the legislation purported to eliminate, had already been eliminated in the early years of this century through addback legislation.

6) Amend the Illinois Income Tax Act to impose a "privilege tax" of 20%on partnerships and S corporations engaged in the business of conducting investment management services. This likely unconstitutional legislation was promoted by the Chicago Teachers Union and other groups. It was based on a determination that the federal income tax rate on "carried interest" is too low and that in the absence of federal legislation, state legislation imposing a surcharge is appropriate. This legislation was introduced in the 100th General Assembly as HB 3393, had multiple Democratic co-sponsors, and actually was voted out of the House Revenue to the House floor.

6) Repeal the phase-out of the corporate franchise tax. Legislation adopted in 2019 began a multi-year phase out of the corporate franchise tax. I suspect we may see legislation to suspend and repeal the phase out.

8) Amend the Illinois Income Tax Act to repeal the foreign dividend subtraction. There have been a number of bills over the years that propose to repeal the foreign dividend subtraction.

See SB 717 from the 99th General Assembly.

Beginning Monday November 16, all of the Assessor's offices were closed to the public.

The November 20 edition of the Illinois Register contains no proposed or adopted rulemakings by the Department of Revenue or any proposed or adopted rulemakings by the Illinois Department of Commerce and Economic Opportunity.

The Department of Commerce and Economic Opportunity proposed emergency amendments to the Business Interruption Grant Program. The Department describes the emergency amendments as follows:

The rules implement the Business Interruption Grant Program authorized by PA 101-636, Article 30 (new 20 ILCS 605/605-1050), PA 101-7, Article 46, Section 100, and PA 101-637, 'Article 30, Section 55. The amendments provide the Department with the ability to administer additional funding rounds to affected businesses if funding is available. The amendments also extend the deadline for recipients of financial assistance to submit their final expenditure reports." 

No new tax-related cases this week.

No new decisions were issued by the Tribunal this week.

The next meeting of the Tax Institute will be held via webcast on Tuesday December 8 from 10:00 until noon. We will discuss the results of the fall veto session, the impact of the election on Illinois and federal taxes, City of Chicago and Cook County taxes, and discuss the Tax Institute's legislative initiatives for the 2021 spring Illinois legislative session.

As usual, the meeting will qualify for CLE and CPE.

Here is a link to the Tax Institute legislative

package for 2020. Please let me know your

thoughts on re-introducing these proposals, as well as your suggestions for additional legislative proposals to be considered at our December 8 meeting.

Email me at kstaats@ilchamber.org to register.