Executive Director
Tax Institute

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Upcoming Events
May 20:  How to Challenge Illinois Audit Assessments and Refund Claim Denials  Join Keith Staats and Paul Bogdanski of Reed Smith for this webinar.  Each member of the Tax Institute is entitled to two free registrations as a benefit of membership. The webinar will qualify for CLE and CPE.  Click  Here to register.

June 9:  Save the date.  Join Keith Staats for a webinar - Administrative Rulemaking in Illinois - What You Don't Know Can Hurt You.  By attending this webinar you will gain an understanding of the Illinois rulemaking process. Each member of the Tax Institute is entitled to two free registrations as a benefit of membership.  The webinar will qualify for CLE and CPE.  Registration details will be available shortly.
May 1, 2020

State and Local Tax  
This Week 

Illinois General Assembly

The House and Senate were not in session this week. The House and Senate are not scheduled to be in session next week.  The Illinois General Assembly website does not list a date for the House to return to Springfield.  The Senate had listed a May 5 date for the next scheduled session day.  As of this morning, that has been changed on the General Assembly web site to 5/12.

The committee deadline (the deadline for moving House and Senate bills out of committee to the floor in the chamber of origin) had been extended to April 24. The House announced previously that the deadline for moving House bills out of committees was extended to May 7.  With neither chamber schedule to be in session before May 12 these deadlines will likely be moved again.

None this week

New legislation
None this week

The state budget - some history, some analysis, and some editorializing 
During the "great recession" of 2008 and for some time thereafter, the states, including the State of Illinois, received a significant amount of funding from the federal government to make up for the shortfalls in state revenues caused by the recession.  

The American Recovery and Reinvestment Act (ARRA) was passed by Congress and enacted into law as a result of the recession of 2008 and 2009. 

The ARRA had two major grant funding streams for the states.  The first, was the State Fiscal Stabilization Fund (SFSF) which was designed to relieve fiscal burdens on the states and local education agencies.  This funding was made pursuant to an allocation formula that consisted of 61% based on the state's relative population of individuals aged 5 through 24, and 39% on the basis of relative total population.

The second program under the ARRA was an increase in the federal Medicaid match.  All states received an additional 6.25% matching percentage on top of their normal match, plus an additional amount that varied by state, based on the state's unemployment level.
The combined value of the two programs distributed to the states for FY 2009, 2010 and 2011 was $147.9 billion.

To receive the funds, the states had to agree to "maintenance of effort" requirements.    The "maintenance of effort" requirement is a feature of a number of federal grant programs. Elementary and secondary and higher education funding had to be maintained at their fiscal year 2006 levels through 2011. Medicaid eligibility had to be maintained as a requirement for the receipt of funds.

I reviewed old budget reports of the Illinois General Assembly's Commission on Government Forecasting and Accountability ("COGFA") for information on how much federal stimulus funding the State of Illinois received under the ARRA.  For FY 2009, Illinois received a bit over $2 billion in total federal stimulus payments.  For FY 2010, the state received about $3.8 billion. For FY 2011, Illinois received $3 billion.  The last year Illinois received payments under ARRA was FY2012, when the state received $800 million.

The Governor's Office of Management and Budget ("GOMB") recently revised the current FY 2020 revenue projections downward by $2.2 billion.(See  GOMB April 2020 Revenue Forecast Revision ) Of that downward projection, $1.1 billion results from Illinois moving the due dates for individual and corporate income tax payments to July 15 from April 15. The $1.1 billion in delayed income tax receipts will be received in Fiscal year 2021 instead of FY 2020.  

The GOMB estimate of the projected budget shortfall for FY 2020 is net of additional payments to be received from the federal government.  The Federal Families First Act increased the state's Medicaid match by 6.2% retroactively to January 1, 2020.  GOMB estimated that this will increase FY 2020 federal receipts to GRF by $459 million. According to GOMB, the state is also scheduled to receive $2.7 billion under the federal CARES Act for its 'necessary expenditures' related to the COVID-19 response.

The Governor's Office of Management and Budget projects downward revisions of FY 2021 tax revenues of $4.6 billion - this is net of the additional $1.1 billion deferred from FY 2020 to FY 2021 because of the change in income tax return and payment due dates to July 15.  GOMB explained that this number reflects an assumption that employment in the state will not show a significant recovery during FY 2021. 

Adding to the projected FY 2021 budget shortfall is the requirement to repay $1.2 billion in short term borrowing the Governor is planning to borrow in May to balance the FY 2020 budget, and the repayment of $400 from the Treasurer's investment borrowing program that is being deferred from FY 2020 to FY 2021.  

When you add in the projected increases in spending originally proposed by the Governor for FY 2021 of approximately $2 billion - that's how GOMB ended up with a projected shortfall of $7.4 if the graduated income tax amendment is not adopted, or $6.2 billion if the graduated income tax amendment is approved. (Recall that GOMB originally projected that the adoption of the graduated income tax would bring in an additional $1.4 billion during the second half of FY 2021 - the GOMB revised projection appears to reduce that projected amount to $1.2 billion.)

It should be noted that the Governor's revised FY 2021 projected budget shortfalls of $6.2 or $7.4 billion do not appear to take into account the receipt of additional federal funding during FY 2021.  GOMB states specifically that the projections also do not take into account continuation of the additional federal Medicaid match enacted by the Federal Families First Act - the rationale is apparently that the increased Medicaid match was to stay in place through the end of the quarter when the emergency is determined to be over.  

Apparently, GOMB is making an assumption that the COVID-19 emergency will be determined to be over by the start of the FY 2021 on July 1. However, this assumption seems to be at odds with their additional assumption that unemployment will not improve during the entirety of FY 2021. They appear to be saying that the emergency will end by July 1, but employment will not increase for the 12 month period after the end of the emergency.  Call me cynical, but it appears that in each of these two instances they have made the assumption that leads to the greatest amount of revenue shortfall for FY 2021. I would be interested in GOMB's rationale as to how these two seemingly inconsistent conclusions can be reconciled.

If you go back to the federal assistance provided in FY 2010, Illinois received $3.8 billion in additional federal funds during that fiscal year as a result of the enactment of the ARRA.  If the State of Illinois were to receive exactly the same amount for FY 2021, that $3,8 billion would wipe out all but $800 million of the GOMB downward tax revenue revision for FY 2021.  (Also remember that the Governor's original FY 2021 budget proposed increased spending by about $2 billion for FY 2021 over FY 2020.)

Looking at the numbers, if the State of Illinois receives an amount of additional federal funding just equal to the highest amount it received during the Great Recession - $3.8 billion in FY 2010, the Illinois budget, while difficult, appears to be nowhere near as dire as the picture painted by GOMB in its April 15 report.  

While it makes sense for the administration to paint a dire picture to maximize leverage for receiving federal funds, it also fits the Governor's narrative that he needs a graduated income tax in order to bring the state to fiscal stability.  

The Internal Revenue Service has established a  Coronavirus Tax Relief web page. IRS released  Notice 2020-32.  This notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.

The April 24 edition of the Illinois Register  and the May 1 edition of the Illinois Register did not contain any proposed or adopted rulemakings by the Illinois Department of Commerce and Economic Opportunity or the Illinois Department of Revenue.  

The April 24 Illinois Register contained a series of emergency amendments to the rules of the Secretary of State, including an amendment to the rules under the Business Corporation Act.  The Business Corporation Act emergency rulemaking extends the deadlines for filing of organizational documents, annual reports, and other business entity materials for the duration of the Governor's disaster proclamations and for 90 days thereafter.

The Illinois Department of Revenue has adopted a new policy whereby it will post on its website, copies of IDOR  "second notice" filings submitted to the Illinois General Assembly's Joint Committee on Administrative Rules ("JCAR").  

For those of you unfamiliar with the administrative rulemaking process in Illinois, the initial publication of an proposed rulemaking in the Illinois Register begins the first notice and comment period which may last for no less than 45 days from the date of publication. During the first notice period, members of the public may submit comments on the proposed rules to the agency that proposed the rulemaking.  

At the end of the first notice period, an agency may commence the Joint Committee on Administrative Rules review process by filing its "second notice" document with JCAR.  The second notice filing must include, among other things, all public comments received during the first notice period and the agency's evaluation of those comments.  

Generally, the second notice is seen only by JCAR and JCAR staff, unless requested by a member of the public.  I generally request copies of second notice filings in the case of more "controversial" rulemakings and those rulemakings where I have submitted public comments on behalf of the members of the Tax Institute. To the extent I determine IDOR has not been sufficiently responsive to any comments I may have submitted, I will often bring my concerns to the JCAR staff and the members of JCAR.

The Department should be applauded for its move to publish copies of all second notice filings on its website. This will provide additional transparency for the rulemaking process.

If you would like to learn more about the rulemaking process in Illinois, sign up for my webinar on June 9.

This week the Department published its second notice filing for its rulemaking implementing P.A. 101-0585 which changes the determination of the foreign tax credit for Illinois residents and when withholding is required from wages of nonresidents working in Illinois.

The Department also published the  second notice for the amendments to the income tax rules that implement the repeal of the prohibition on persons who are required to use different apportionment methods from being members of the same unitary business group.

Court cases
The Illinois appellate court issued a decision in Safety-Kleen Systems, Inc. v. Department of Revenue. This case was an appeal of a ruling by the Independent Tax Tribunal on motions for summary judgment filed by the taxpayer and the Department.  

The Tribunal found that the temporary storage exemption from the Use Tax did not apply to Safety-Kleen's purchases of solvent.  The appellate court upheld the determination of the Tribunal.  The taxpayer attempted to differentiate its facts from the facts in Shared Imaging LLC v. Hamer, 2017 IL App. (1st) 152817.  The court disagreed.

Tax Tribunal 
No new decisions were issued this week.

None of the new cases were filed with the Tribunal this week raise unique issues.

Publications and Announcements
Tax Institute member law firm HMB (Horwood Marcus & Berk) is hosting a series of state tax webinars. Check out the events portion of the link. 

The Lincoln Institute of Land Policy issued a report, Property Taxes and DOVID10.

Cathleen Bucholtz and Michelle Moloian of Tax Institute member accounting firm True Partners Consulting will present an  Unclaimed Property Webinar on May 6.

The Institute on Taxes and Economic Policy has started a  State Rundown Blog.  While I virtually always disagree with the policy solutions espoused by ITEP, the blog provides their take on the impact of the COVID-19 pandemic on state and governments.

Project Safe is an effort by a group of academics to leverage the COVID-19 pandemic to promote adoption of their pet state tax law changes.  Among their proposals are the following:

  • Impose new excess profits taxes, taxes on certain forms of wealth or unrealized capital gains, and/or other taxes on wealthy individuals and businesses that are suffering less from the downturn.
  •  Expand state sales tax bases, through
and finally adopt mandatory world-wide combination.

Some or all of these proposals are likely to emerge in Illinois as the Illinois General Assembly looks for ways in which to fill the budget gap. I will be ready to oppose these proposals on behalf of the membership.

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