On February 17, 2021, Illinois Governor JB Pritzker published his proposed budget (the Pritzker budget) for fiscal year 2022.1 To close a projected deficit of nearly $ 3 billion, the Pritzker budget proposes several so-called “Business Gaps” – certain tax breaks and incentives provided by applicable law – including the temporary limitation on the deductibility of net operating losses (NOLs), the decoupling from the federal treatment of dividends from foreign sources and the so-called global low-tax intangible income (GILTI ) and reversing the repeal of the generally maligned Illinois franchise tax.
In 2020, the governor backed an unsuccessful election move to amend the state constitution and approve a tiered income tax to generate revenue to address the state’s tax problems. Throughout the election season, he warned that failure of the measure would lead to profound cuts or a general increase in income tax. However, the Pritzker budget does not. Rather, it is based on a mixture of spending cuts and the removal or limitation of various tax breaks and incentives, including those that he agreed under a bipartisan budget agreement for 2019 for the 2020 financial year (2019 agreement).
Tax changes proposed by Pritzker – initial observations and questions
- Temporary ceiling on corporate NOLs (estimated at $ 314 million). The Pritzker budget suggests capping the number of NOLs that can be deducted in a tax year to $ 100,000 for the next three tax years. The Pritzker budget estimates that 80% of Illinois taxpayers with NOLs will not be affected by the limit. The Illinois Department of the Treasury (the Department) has stated that restricted NOLs may be transferred for use in future years. Thus, this proposal effectively results in an Illinois corporate taxpayer loan without interest for the next three years
- Corporate Income Tax Reversal (estimated $ 30 million). The Pritzker budget is proposing to end the Illinois corporate tax exit, one of the most despicable taxes for corporate taxpayers in Illinois. The governor had previously approved a gradual exit from franchise tax as part of the 2019 agreement mentioned above.
- Rollback of TCJA 100% dividend deduction from foreign sources and 50% deduction for GILTI (estimated $ 107 million). The Pritzker budget proposes to decouple from federal deductions for dividends from foreign sources and GILTI. Instead, the Pritzker budget suggests allowing corporate taxpayers to take advantage of the domestic dividend deductions approved under Section 243 of the Internal Revenue Code.
- Eliminate the Blue Collar Jobs Act (estimated at $ 16 million). The Pritzker budget proposes repealing the Blue Collars Jobs Act, a program launched under the 2019 Agreement to stimulate investment and create high-paying worker jobs in Illinois. The program was supposed to go into effect on January 1, 2021, but the governor has previously frozen the program and cited the lost revenue from the COVID-19 pandemic.
- Manufacturing Machinery and Equipment Sales Tax Exemption Limitation (estimated $ 56 million). As part of the 2020 budget, the exemption for manufacturing machinery and equipment has been changed to include production-related tangible personal property (previously exempted under the manufacturer’s purchase credit, which expires in 2014). The Pritzker budget repeals this change so that production-related material personal property is no longer exempted.
- The decoupling from TCJA accelerated depreciation (estimated at $ 214 million). Under the TCJA, buyers of capital assets are allowed to spend the entire cost of the capital asset in the year the asset is put into service (rather than amortizing the cost over several years). The Pritzker budget proposes decoupling from this accelerated (or bonus) depreciation and instead allowing taxpayers to write off the cost of the asset over the schedule that would otherwise be permitted under Section 168 of the Internal Revenue Code (disregarding the Acceleration regulations of the TCJA). Also, because this proposal would only defer, rather than eliminate, depreciation allowances, this proposal effectively results in an Illinois corporate loan without interest.
- Limit retailers’ rebate to sales tax collection costs (estimated at $ 73 million). As in many states, Illinois allows retailers to withhold a percentage of sales taxes collected from customers as a reimbursement of the costs retailers incur in collecting and remitting taxes to the state. The Pritzker budget suggests capping this discount to $ 1,000 per month. By capping the discount to a flat $ 1,000 per month (regardless of the size of the business or the amount of taxes levied and remitted), the proposal ignores the fact that larger businesses with higher sales volumes have significantly increased collection and remittance costs.
- Eliminated sales tax exemption on biodiesel sales (estimated at $ 107 million). Currently, certain types of biodiesel blends receive full sales tax exemptions. The Pritzker budget proposes to completely eliminate any sales tax exemption for biodiesel.
- Limit on credit available under the Illinois Tax Credit Scholarship Program (estimated at $ 14 million). The Illinois Tax Credit Scholarship Program (known as the Invest in Kids Act) was passed in 2017 to encourage donations to fund scholarships for children who meet certain income requirements to attend qualified non-public schools. The program provides a 75% state tax credit for qualifying contributions to certain grant providers, provided the donor does not claim any portion of the contribution as an individual withholding on their income tax return. The program is expected to expire on January 1, 2024. Under the Pritzker budget, the state income tax credit for qualified contributions would be reduced to 40% for the remaining years of the program, but donors could claim the contribution as an individual deduction on their federal return.
While the Pritzker budget proposals may not all ultimately become law, Illinois corporate taxpayers, along with their tax advisors, should carefully consider and plan the impact of these and other potential changes on their business. Given ongoing budget pressures and the state’s significant unfunded pension obligations, the governor must continue to limit spending and find new sources of income to balance the state budget.
1 A copy of Governor Pritzker’s proposed budget for the Illinois fiscal year 2022 is available at www2.illinois.gov/sites/budget/Documents/Budget%20Book/FY2022-Budget-Book/Fiscal-Year-2022-Operating-Budget.pdf.
2 During the last legislative veto session, Governor Pritzker and other Democrats in the Illinois General Assembly sought to pass laws that would have decoupled from certain tax-favorable temporary changes to the Coronavirus Aid, Relief and Economic Security (CARES) Act and NOL restrictions, originally enacted under the Tax Reduction and Jobs Act (TCJA). While the Pritzker budget makes no mention of these decoupling efforts, we understand that decoupling from these changes to the CARES law will likely remain a legislative priority during the spring legislature.