SPRINGFIELD — Gov. J.B. Pritzker is asking lawmakers to eliminate nine tax breaks to balance the fiscal year 2022 budget by the end of May. Lawmakers and business groups argue the tax breaks are good for the economy, especially as the state recovers from the pandemic.
When Pritzker delivered his annual budget address from the State Fairgrounds in February, he proposed eliminating $932 million of tax breaks that he called "corporate loopholes." He also proposed keeping spending flat after the pandemic reduced revenue.
"I had bolder plans for our state budget than what I am going to present to you today. It would be a lie to suggest otherwise," Pritzker said in his address. "But as all our families have had to make hard choices over the past year, so too does state government."
Here are the nine tax breaks he is proposing be eliminated with the amount the governor's budget staff expects to save with the cut:
Cap corporate net operating loss deductions at $100,000 each year: $314 million
Companies are allowed to make deductions on their income taxes when their operating losses exceed income. Businesses do this to defer losses to future years that are more profitable to avoid losing more in the short term. Capping operating losses at $100,000 for a year will require businesses to pay more on taxes in the short term and generates more tax dollars immediately.
People are also reading…
The governor's office says 89 corporations out of over 2,800 accounted for over half of these kinds of deductions in 2018 and the change will impact about 20% of Illinois corporations.
"Given that the research shows there is no statistically meaningful correlation between tax policy changes and job or economic growth, elimination of this tax expenditure cannot be expected to create any economic harm for the state," said the Center for Tax and Budget Accountability.
State Rep. Tom Demmer, R-Dixon, disagrees.
"I think most business owners would say changes to tax law has an impact on business climate in a state... to say that tax law doesn't have an impact on that misses reality," Demmer said.
Illinois Chamber of Commerce President Todd Maisch argued the state mandated that businesses take losses in 2020 under pandemic restrictions and telling them now they can't have a write off on those losses is "offensive."
Align foreign-source dividends with domestic source dividends: $107M
Currently, U.S. corporations in Illinois can make deductions on their taxes for foreign income that has already been taxed. This was a part of the 2017 Trump tax plan, known as TCJA.
Pritzker's team argues this treats foreign dividends better than domestic dividends- a disadvantage to the state. Opponents argue this amounts to double taxation because they're getting taxed on foreign income at the same time they're getting taxed on domestic income.
"The reality is, you can not tax dividends from foreign subsidiaries without increasing domestic subsidiaries as well. Really what you're doing is putting another form of taxation on domestic employment, domestic demand, domestic profits," Maisch said.
State Sen. Melinda Bush, D-Grayslake, a member of the Senate revenue committee, said she is in favor of this and "if someone is going to keep their money offshore I don't think we should be giving them tax credits for that."
Roll back federal Tax Cuts and Jobs Act of 2017 to 100% accelerated depreciation: $214 million
The Tax Cuts and Jobs Act of 2017 or TCJA, makes changes to this tax code requiring Illinois to decouple from federal tax law.
Pritzker is targeting the provision allowing businesses to make deductions on investments for the business, like machinery, in the current year the investment is made.
"The 100% first year deduction does not accurately reflect the depreciation of an asset over its useful life," states a fact sheet from the governor's office.
Demmer is concerned about Illinois taking a different approach than other states.
"That makes Illinois less competitive economically than other states when we decide to say this change that happened at the federal level is going to be ignored here," he said.
Accelerate expiring exemptions for biodiesel: $107 million
Illinois currently has an exemption from the federal tax on biodiesel that is set to expire in 2024. Pritzker is looking to allow that exemption to expire immediately to bring tax dollars in sooner.
According to the Illinois Chamber of Commerce, "Currently, biodiesel blends containing more than 10 percent biodiesel but no more than 99 percent biodiesel, 100-percent biodiesel, and majority blended ethanol currently receive a full sales tax exemption."
Demmer says just because Pritzker thinks he is solving a problem by bringing more revenue in now doesn't make future budgets any better.
"I think we have too often looked at budget years just in isolation, saying 'oh let's just get through this year, whatever it takes,' ignoring the fact that whatever challenges were in place before COVID are going to be in place after COVID," Demmer said.
Reinstate corporate franchise tax: $30 million
The franchise tax charges corporations for operating in the state. It was repealed in 2019 with support from lawmakers on both sides of the aisle. At the time, Pritzker even called it "relief for 3,000 small businesses."
"The franchise tax was highly unpopular with the business community and it may be politically difficult to eliminate its repeal," according to the CTBA.
Demmer said lawmakers got rid of it because it didn't make sense to have a tax on businesses that in some cases was as low as $25 and Maisch said he believes many businesses that should have paid the tax didn't and the state didn't bother tracking them down for it. Bush also did not feel strongly about reinstating it, but said she had not looked into it much.
Cap retailer's discount at $1,000 a month: $73 million
Under current tax law, Illinois retailers receive a 1.75% discount on the sales taxes they owe. Pritzker's office says this discount costs the state and local governments $250 million a year. By capping it a $1,000 a month, they say businesses with income less than $500,000 a month, or about 99% of businesses, will not be impacted.
"Illinois is one of only 26 states of the 45 to impose a sales tax nationally that has such a program. Most states with this tax expenditure limit or cap it in some way," the CTBA says.
However, Maisch points out tax discounts matter to businesses and the overall health of the economy, even if it is a small number of businesses being effected.
"Even at 2%, that's an awful lot of retailors and that's an awful lot of total sales. We want to treat our locally owned garden shops fairly, but the amount of money a locally owned Walmart superstore generates is so much more," he said.
Reset tax credit for private school scholarships to 40%: $14 million
The Invest in Kids Tax Credit Scholarship program allows donors to received a 75% tax credit on their donation. Pritzker is proposing that credit be reduced to 40%.
In a statement, the Catholic Conference of Illinois said this idea "reduces the most effective state program for low-income and working-class students in Illinois. Even during the pandemic, scholarship recipients have been attending high-quality, nonpublic schools."
Bush says this benefit for low-income students is one reason the credit was passed.
"The tax credits made sense to us because they were given to families that really needed the help in order to send their children (to school). I think we're going to look at that one really closely," Bush said.
"I don't see that as a corporate loophole, but I see it as a place where we recently gave a tax credit and perhaps we should be looking at all the tax credits that we added over the last few years to see which ones are actually producing what we thought they were going to produce."
Eliminate Blue Collar Jobs Act: $16 million
The Blue Collar Jobs Act was set to take effect at the beginning of 2021. Pritzker froze it from taking effect in hopes of bringing more revenue in.
Republicans and the business community say this is the wrong move to help Illinois' economy recover. The act gives tax credits to businesses for new construction to incentivize job creation.
"We are attracting data centers to Illinois because we implemented a data center tax incentive. We're attracting more building and construction in the state as a result of the Blue Collar Jobs Act," Pritzker told Capitol News Illinois in January 2020.
Republicans say Pritzker knows this program is beneficial to the state because he continues to tout tax credits for data centers and a Chicago film tax credit as policies that are good for the economy. Demmer said the BCJA was part of a bipartisan agreement helping Pritzker's capital plan pass in 2019.
"Republicans were especially offended in my opinion that a Democratic governor would go back on his agreement to sign something that's going to help middle class blue collar jobs," Maisch said.
Bush pointed out the need to evaluate just how many jobs such a tax credit creates. She cited the Foxconn project in Mount Pleasant, Wisconsin as evidence that tax credit projects don't always work out the way they were intended. The project was touted by former Republican Gov. Scott Walker and Trump for creating blue collar jobs, but the project has lagged.
"They raise a good question. How many jobs did they create? It's not just the jobs they create to build the building, it's also the jobs they create to sustain that area," Bush said.
Remove production-related tangible personal property from Manufacturing, Machinery and Equipment sales tax exemption: $56 million
Business can make deductions on purchases of equipment they use frequently in the production process.
Maisch called the language Pritzker uses "misleading." He says this tax credit references the part to machines when they are sold and businesses get tax credits when using the raw materials to make machines that make the products.
"We should even differentiate between the steel that goes into the manufacturing of a lawnmower and the lubricants that get put in that are absolutely vital to the process," Maisch said.
For now, it's not clear which, if any, of these eliminations will pass. Lawmakers have passed many of these tax breaks at various points in time, which requires them to passes bills to undo the exemptions or decouple from federal law.
Illinois' new fiscal year begins July 1 and state lawmakers will work to pass a budget by the end of May. The Illinois Constitution requires the budget to be balanced when passed.