IVCA Legislative Update

IVCA Legislative Update

January 19, 2011

In the final hours of the veto session of the 96th General Assembly, the Democratic leadership in both Houses passed tax increases on both personal and corporate income and the suspension of net operating loss deductions, all with the strong support of Governor Quinn. The increase was passed with no Republican votes in either the House or Senate. The House vote was 60-57; the Senate vote was 30-29. This last minute push was not unexpected given the leadership's weakened majorities going into the 97th General Assembly and the likelihood that the newly elected Democrat freshman would be unwilling to cast one of their first votes for such an unpopular measure. The Governor signed legislation (SB 2505) on January 13th.

The leadership cited unsustainable budget deficits, increasing problems with the state's credit rating and the need to pay state bills in a more timely manner as the primary reasons for the large tax increases. Most observers agree with this assessment but many in the business community especially argue that the tax increase should have be combined with significant outright reductions in state spending along with programs to improve the cost efficiencies of all state programs.

Before this increase Illinois ranked 23rd on The Tax Foundation's 2011 State Business Tax Climate Index, we now move down to 35th out of 50 states.

The 2011 Tax Foundation says "The states do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state's competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately it will affect the state's national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states."

Governor Mitch Daniels of Indiana (ranked #10 on the Business Tax Climate Index) observed "Watching you guys, I mean I shouldn't make too light of it, I think this is really a bad situation.".... "If you want to bring new jobs to your state the last thing you do is make it more expensive to hire people..." The Governor of Wisconsin also suggested businesses move to his state but since Wisconsin is one of only 15 states ranked worse than Illinois, at 40th, the suggestion will probably not be embraced.

Unfortunately, the legislators could not move job creation legislation advocated by IVCA. While the Senate unanimously approved continuation and expansion of the Technology Development Account (TDA II; HB4819/SB3655) for the third year in a row, the bill could not move out of the Rules Committee in the House. The very successful TDA I that invests in venture & private equity funds in Illinois has already created 3,600 jobs in the state - “ and attracted many millions of dollars of additional investment from outside the state -- at no net cost to the taxpayers.

Key provisions of the new tax bill (rates are effective as of 1/1/11):

  • Individual income tax rate increases from 3% to 5% (a 66% increase). The full increase is supposed to be temporary, declining to 3.75% in 2015 with a further decline to 3.25% in 2025. Past experience with planned "temporary" income tax increases, however, has shown that sometimes these temporary taxes ultimately result in permanent increases. Provisions to provide additional property tax relief were not included in the bill.
  • Corporate income tax rate increases from 4.8% to 7%. The full increase is also supposed to be temporary, declining to 5.25% in 2015 with a further decline to 4.8% in 2025. Again many suspect these increases will be permanent.
    • Total corporate income tax now is among the highest in the nation. Illinois is one of the few states which has an additional corporate tax in the form of the Personal Property Replacement Tax (PPRT). For owners of flow-through entities, e.g., S corporations, partnerships and trusts, the PPRT remains at 1.5%. For C corporations, the PPRT remains at 2.5%. So for flow-through entities, the increased corporate income tax combined with the PPRT, raises the tax rate to 8.5%. The total corporate and PPRT tax for C- corporations increases to 9.5%. And there is no guarantee that the General Assembly will keep the current PPRT status given efforts in recent years to change the regulations to pull in more tax dollars. Strong business opposition has prevented the increases.
  • Multi-year suspension of the net operating loss deduction for corporate taxpayers. The suspension is applicable for tax years ending after 12/31/2010 and before 12/31/014. The net operating loss deduction carryover period is extended for the same time period.
  • The Illinois estate and generation skipping tax is also reinstated.
  • An annual cap on state expenditure growth of about 2%. Republicans allege that these caps will do little to stem state spending. They argue that state spending is scheduled to increase by $3 billion for FY 2012 (which begins in July); and will then increase by almost another $1 billion a year for the following three fiscal years. The Chicagoland Chamber of Commerce puts the 3-year increase at $2.3 billion.

Republicans also add that the spending caps will not apply to existing or newly created special funds so the General Assembly or Governor can expand spending without limits by creating special funds. The Governor would also be allowed to exceed spending caps by declaring a fiscal emergency but either the Comptroller or Treasurer can veto such a declaration (currently both offices are held by Republicans). The Governor was also given authority to reduce or skip mandated, unappropriated future pension payments to free-up revenue to spend on other purposes. This new authority to continue to under-fund public pensions is shocking to many observers given Illinois' prominent ranking as having the worst under-funded public pensions in the country. It appears that this problem could likely worsen if the Governor exercises this new authority.

 Â· In a related development, Speaker Madigan did not call for a vote on workers compensation reform - something the Republicans and pro-business interests wanted to see enacted prior to any tax increase. Additionally the proposed $1/pack cigarette tax failed in the House by a vote of 51-66.

 Â· Earlier in the veto session the House and Senate approved a measure (HB 3659) requiring the collection of sales and use taxes on products and services generated by advertising or marketing (including clicks) by affiliates with an office in Illinois regardless of the home state of the purchaser. The measure was quickly passed by the General Assembly with little public debate. It is now awaiting the Governor's signature.

Citing the adverse impact on Illinois-based advertisers, TechAmerica Midwest is leading the effort to persuade the Governor to remove the problematic provision in the bill through an amendatory veto. Click here to view TechAmerica's letter to the Governor. If this is an issue for your firm, please write the Governor soon to add your support for an amendatory veto.

 Contact the Governor HERE or at:

Office of the Governor
James R. Thompson Center
100 W. Randolph, 16-100
Chicago, IL 60601
Phone: 312-814-2121