The budget proposal contains no reforms of pensions or other cost drivers, misleadingly describes various trade tax increases as “closing tax loopholes for companies” and relies on gimmicks that hide real deficits. And there is a new gas tax.
In the governor's annual budget address on February 17, Governor J. B. Pritzker presented a budget of $ 41.6 billion for fiscal year 2022, with spending on education and most government operating expenses unchanged.
Pritzker was tasked with closing a $ 4.8 billion deficit reported in November 2020 that would have grown to $ 5.5 billion, including a $ 690 million payment for the recent borrowing from the Federal Reserve .
Pritzker's budget is heavily based on nine different tax increases, aimed primarily at corporations to generate $ 932 million in revenue. In his speech and in documents from the governor's budget office, the tax hikes are described as "closing tax loopholes for businesses". However, none of the exceptions or credits that Pritzker suggests to limit or eliminate can be described as "loopholes". Some are not exclusive to businesses.
For example, a Pritzker proposal would reduce the value of a tax credit scholarship program that helps disadvantaged students obtain private schooling through donations from companies and individuals. Another proposal does not concern any type of credit or deduction, but rather imposes the arcane "corporation tax" of the states, which according to current law is to expire by 2024. And another is a new gasoline tax that will hurt Illinois farmers and add 20 cents per gallon of diesel.
The State Budget Act requires the governor to propose a budget that is balanced only using statutory revenue at the time of the budget submission. That requirement was ignored in Pritzker's first and second budget proposals, and these nine new taxes mean they are also included in his third budget.
Despite these tax increases, Pritzker's budget proposal is not really balanced. It does not contain reforms of pensions or other structural overspending that would correct the long-term deficit of the state. Instead, the budget leverages generous budget gimmicks like changing the timing of payments – moving one debt service to fiscal 2021 while pushing other payments further into the future – and saving $ 565 million from other government accounts. Instead of going to the street fund and capital projects, Pritzker would redirect the sales tax receipts from gasoline sales and cigarette tax receipts to the general fund.
By changing the timing of payments, Pritzker can avoid adding nearly $ 1 billion in costs to this year's budget – $ 276 million for Interfund delayed debt servicing and $ 690 million early borrowing for the Federal Reserve -Dollar. However, changing the time of payment does not improve the general financial position of the state. It's an accounting shell game to help keep budget balanced on paper.
The remainder of the deficit will be covered by spending freezes of $ 1.27 billion and much more optimistic revenue assumptions compared to the governor's spending published in November 2020. These spending changes are not actual reductions from the previous year's spending, but rather the cancellation of automatic spending growth, which is adopted as part of the state's basic budgeting method.
More optimistic sales projections lead to the largest reduction in the deficit on paper at $ 1.88 billion. The governor's office also raised its revenue guidance for the current fiscal year 2021 by $ 2.3 billion, "closing" this year's $ 3.9 billion deficit when the $ 2 billion in loans from the Federal Reserve in December to be counted as revenue. Illinois has historically counted debt as revenue and relied on optimistic revenue projections to cover deficits on paper, but that optimism is often wrong. This explains why politicians claim to pass a balanced budget every year, but which has not been in the black since fiscal 2001.
While state and local revenue collections in Illinois and across the country have surpassed estimates made at the start of the pandemic, the governor's office and budget revenue projections in November were already $ 2.2 billion higher than forecast in April 2020. It is unclear that economic conditions have changed enough since November to warrant another large upward revision.
Overall, Pritzker's budget proposal does not provide the essential financial reforms needed to protect Illinois taxpayers, maintain long-term services for those in need, and ensure a strong state recovery from COVID-19. Illinois personal income growth was the second worst in the nation after the Great Recession, due in part to tax hikes that hampered recovery. The various corporate tax increases proposed by Pritzker jeopardize Illinois' ability to create high-paying jobs and raise wages for its residents as the state recovers from a pandemic-triggered recession.
It is largely expected that lawmakers will receive unrestricted $ 7.5 billion state budget aid from the federal government under President Biden's administration proposed state and local bailout of $ 350 billion. This lifeline gives Illinois breathing room to make the long-term changes needed to stabilize public finances, beginning with pension reform. The General Assembly should also use that help to remove all nine tax increases from the pandemic from the governor's budget proposal.
Here are Pritzker's nine tax hike proposals.
Cap, Delay in Credit for Operating Losses by Three Years: $ 314M
If a company loses money in any given year, known as net operating loss, federal and state tax laws generally allow at least a portion of that loss to be carried forward to future years as an offset in proportion to future tax liability. In other words, if a company loses money in 2020 and 2021 due to the pandemic but makes a profit in 2022, it can deduct the two-year losses from its 2022 revenue and only pay tax on the difference.
For state tax purposes, Pritzker plans to limit loss carryforwards to $ 100,000 for the next three years. Companies could continue to carry losses above that amount but would not be able to claim the deduction for three years.
This change would reduce companies' cash on hand to invest in equipment, new jobs, or raise salaries for employees. This would affect Illinois' ability to economically recover from COVID-19. Because the full value of the loans is only delayed, it can result in a significant drop in sales in the future as companies attempt to collect the full value of the loans.
Business investment delay expense: $ 214 million
Illinois automatically adopts certain changes to federal tax law as part of the Illinois tax law through what is known as "rolling compliance." This means that state law will refer to the Internal Revenue Code and automatically update certain regulations accordingly. Pritzker wants to decouple himself from federal regulations to promote growth-promoting investments.
The federal tax reform in the Tax Cuts and Employment Act included several changes designed to strengthen business investment and promote economic growth. One of these changes was to allow for full and immediate reimbursement, which means companies can deduct the full cost of an investment in the year it was made, rather than taking the reimbursement beyond the life cycle of an asset.
The Tax Reduction and Jobs Act applied this concept, also known as 100% Bonus Amortization, to investments with a useful life of 20 years or less, such as: B. Machines and devices. Long-term investments in buildings still have to be recorded as an expense over time. The changes for short-term investments are expected to expire in 2022 and expire in 2026. The non-partisan tax foundation has advocated making these changes permanent, as delaying investment deductions increases costs for businesses and discourages investments that help the economy grow.
“If capital investment depreciation allowances are extended over time, a company cannot fully recover the cost of the investment. This discourages companies from making productive investments that would otherwise be worth pursuing, ”the tax foundation stated.
The change proposed by Pritzker would immediately revert to the previous system of expanding Illinois tax deduction, and discourage the very investments that will help Illinois recover from the COVID-19 economic downturn.
Double taxation gains US companies earn abroad: $ 107 million
Another aspect of the federal tax reform in the Tax Reduction and Employment Act was the transition from a “global” to a “territorial” corporate tax system to encourage companies to repatriate some of their overseas funds. One of the most important aspects of this reform was the end of the double taxation of US company profits earned abroad by providing a 100% deduction for foreign dividends paid to the parent company. These profits would have already been taxed in the country where the income was obtained.
Pritzker suggests removing credit for foreign dividends, which could deter those profits from being repatriated and brought to Illinois if the overseas profits were treated more favorably for tax purposes.
New sales tax on biodiesel gasoline: $ 107 million
Under current law, fuel with a biodiesel content of more than 10% or an ethanol content of at least 70% is exempt from sales tax in Illinois. The exemption is slated to expire in 2024, but Pritzker would cancel the loan immediately.
Josh Sharp, CEO of the Illinois Fuel and Retail Association, responded, “This change would add about 20 cents to a gallon of diesel fuel and is especially outrageous considering that Illinois is one of only six states that already have a sales tax on fuel. Ending this incentive would also be incredibly detrimental to our vital Illinois agriculture and would hurt my small business owners at a time when it is so easy for customers to drive across state lines to refuel their vehicles. "
Limit retailer reimbursements for state sales tax collection to $ 73 million
Illinois retail stores collect and transfer sales tax on behalf of the state that incurs administrative expenses. In order to reimburse retailers for this service to the state, retailers can, under applicable law, withhold 1.75% of the sales tax they levy as compensation. Pritzker wants to limit retailer reimbursements to $ 1,000 per month.
The Illinois Retail Merchants Association said the current 1.75% amount already "only partially reimburses" storekeepers. The statement went on to say, “Shifting more of the administrative and collection costs to retailers is not helping the troubled businesses and indicates that the governor is not fully realizing what retailing is doing to our state , which employed a fifth of all workers in Illinois prior to the pandemic and served as the second largest source of income for the state government and the largest source of income for local governments. "
Manufacturing Equipment Sales Tax Exemption Limit: $ 56M
The purchase of machinery and equipment for manufacturing is generally exempt from sales tax in Illinois. In 2019, this exemption was expanded to include “material personal property” that is used in the manufacturing process, such as B. Fuels, coolants and oil that are consumed in the manufacturing process. Pritzker suggests reversing this latest change.
According to the Sales Tax Institute, the expansion brought Illinois manufacturing credits more in line with nearby states.
Illinois manufacturing has consistently lagged other Midwestern states since the Great Recession. Even before COVID-19, Illinois lost 13,100 manufacturing jobs in 2019 – the largest percentage loss of any employment sector.
Steve Rauschenberger, President of the Technology and Manufacturing Association, highlighted the removal of this extended exception in his response to Pritzker's budget proposal. "We urge the governor to stop campaigning for policies that will bring Illinois people to the unemployment line and to force our job creators and innovators to leave our state in order to survive," said Rauschenberger.
Canceling Expensive Franchise Corporate Income Tax Exit: $ 30 million
Only 16 states still have "capital taxes," which companies tax on their net assets regardless of whether the business is profitable, according to the tax foundation. "These taxes stunt economic growth in the best of times, but during an economic downturn, they're especially detrimental to businesses struggling to stay viable," the tax foundation said.
Illinois confusingly refers to its capital tax as "corporate franchise tax," even though it has nothing to do with franchise businesses. Compliance with tax law is complicated and comes with high compliance costs that are particularly difficult for smaller businesses to manage. The cost of tax compliance is more than many businesses owe the state.
The tax was due to expire over four years before being completely abolished in 2024 under a law passed in 2019.
Although Pritzker announced the abolition of this tax as a first year achievement, he is now proposing to reverse the change.
Eliminate Construction Job Creation Loans: $ 16 Million
The Blue Collar Jobs Act, passed in 2019, created new tax credits to incentivize job creation in the construction industry. Eligible companies could receive a credit of 50% of the new wage tax, which will be withheld due to a construction job created. This credit rose to 75% if the job was created in an economically deprived area.
Reduce Underprivileged Student Tax Credit: $ 14 Million
State lawmakers passed the Investing in Children Act in 2017 as part of a revision of the education funding formula. The program is the state's first school election program and is one of the largest in the country. It gives disadvantaged students the opportunity to attend private schools by providing scholars with a 75% tax credit for their donation on state taxes, which is an incentive for those donations.
Only students within 300% of the federal poverty line can receive scholarships, and the neediest students are prioritized first.
Pritzker plans to reduce the value of the loan to 40%, which would inevitably mean fewer scholarships for low-income students.
Empower Illinois, a nonprofit that brings scholarship and school together students, responded, “In these challenging times, children need more quality education, not less. And while Illinois financial challenges are substantial, the state should not base its budget on children from low-income and working-class communities or the schools that serve them so well. "