Not everyone’s happy with Gov. J.B. Pritzker’s budget proposal. But the “pain,” the deep cuts and the across-the-board tax increases that the Democrat predicted would follow last fall’s failed amendment to generate more income tax revenue haven’t materialized.
Instead, the spending plan Pritzker presented last month and which lawmakers will contemplate in coming weeks eats up a projected $2.6 billion deficit in part by curtailing spending by $400 million and raising $1 billion in taxes through eliminating what he calls “unaffordable” corporate loopholes — several of which weren’t loopholes two years ago when he signed them into law.
Pritzker had pinned his hopes on an extra $3 billion for the budget through a constitutional amendment that would have adjusted tax rates to hit the rich harder. It was soundly defeated in November’s election. So he wants to squeeze $931 million through tweaks in tax law. Critics object to the nomenclature.
“It’s an intentional deception,” said Rob Karr, president and CEO of the Illinois Retail Merchants’ Association. “A loophole is some way a clever lawyer or accountant found to get around something that wasn’t intended. All of these were debated, adopted, enacted by sitting assemblies and a governor.”
Illinois expects $7.5 billion from the most recent federal COVID-19 relief plan. But there are yet-to-be-announced rules on spending it. In his February budget address Pritzker said the money must pay down overdue bills and other debt — and “anything remaining must be used to invest in expanding jobs and economic growth.”
Here are the tax incentives Pritzker would eliminate or adjust for the budget year that begins July 1, and the amount of money generated:
CAP ON NET OPERATING LOSS DEDUCTIONS ($314 million)
For three years, deductions for business losses would be capped at $100,000 a year. But the Pritzker administration has indicated that losses restricted in the near term could be carried forward, according to an analysis published by tax attorneys for the Chicago law firm Sidley Austin which, it concludes, “effectively results in an interest-free loan from Illinois corporate taxpayers.”
Pritzker has said 80% of corporations with losses would not be affected by the limit. But business interests argue it’s the worst time for it after a year of red ink delivered by the COVID-19 pandemic.
REDUCED ACCELERATED EQUIPMENT DEPRECIATION ($214 million)
The federal Tax Cuts and Jobs Act of 2017 allowed a company that buys a piece of equipment to deduct its entire value from taxes all at once. Normally, depreciation in value occurs over a longer period of time, which Pritzker’s plan would impose. Again, it defers the deduction, so it’s not a long-term savings to the state.
Mark Denzler, president and CEO of the Illinois Manufacturers’ Association, argues that COVID-19 forced equipment purchases for patriotic, as well as practical purposes.
“It was for sanitation purposes, cleaning facilities, or in the case of many manufacturers, they bought new equipment to respond to the pandemic, so they could provide face masks or face shields or make ventilators,” Denzler said.
BIODIESEL EXEMPTION EXPIRATION ($107 million)
Illinois is one of only about a half-dozen states that collects sales tax from motor fuel. Since 2003, Illinois has spared diesel fuel made with at least 10% biodiesel, a soybean byproduct. The law is up for renewal in 2023, but Pritzker wants to end it now.
It’s allowed Illinois, a checkerboard of interstates and railroads carrying freight, to stay fuel-competitive with its neighbors, supporters say. If the state imposes its 6.25% sales tax — and any sales the state taxes, local governments may tax, too — it could mean substantially fewer agricultural and biodiesel industry jobs, said Josh Sharp, executive vice president of the Illinois Petroleum Marketers.
“People are going to bypass Galesburg and go into Iowa, they’re going to bypass Edwardsville and go to St. Louis,” Sharp said.
CAP ON RETAILERS’ DISCOUNT ($73 million)
Retailers must collect and send to the state the tax imposed on their sales, both state and local portions. They may keep 1.75% of that collection as reimbursement. Pritzker would cap that amount at $1,000 a month. When making similar proposals in the past, he argued that only the biggest retailers ring up more than $1,000 in collection costs.
Karr, of the retail group, points out that the current reimbursement only covers 44% of retailers’ collection costs. Many fear what is a $1,000 cap now will continue to decrease.
MANUFACTURERS’ PURCHASE CREDIT ($56 million) and CORPORATE FRANCHISE TAX ($30 million)
Pritzker would end a tax break he signed in 2019 to renew the Manufacturers’ Purchase Credit to include products used in production, but not part of the final product, such as fuel oil or lubricant.
And he boasted of providing tax savings for 317,000 businesses by eliminating the Corporate Franchise Tax, a business-operation fee dating to 1872 and criticized as anachronistic and burdensome. His plan would cancel its phaseout.
TAX CREDIT FOR PRIVATE SCHOOL SCHOLARSHIPS
An attractive 75% tax credit for contributing to private-school scholarships was built into landmark 2017 education reform legislation. Pritzker proposes reducing it to 40%.
In three years, donations have reached $127 million to provide 16,000 needs-based scholarships to students in 650 participating schools, including Catholic, Jewish, Montessori and Christian schools, said Robert Gilligan, executive director of the Catholic Conference of Illinois. White students have received 45% of the scholarships, with 39% going to Hispanic pupils and 17% to Black children.
But there are 25,000 others waiting in line, Gilligan said. Reducing the credit would likely reduce donations and scholarships.
Other initiatives Pritzker proposed include generating $107 million from re-aligning the tax treatment of foreign-source dividends with domestic-source dividends, a change from 2017 tax law, and saving $16 million by halting another 2019 Illinois law he signed intended to spur investment in well-paying blue-collar jobs. Scheduled to start Jan. 1, Pritzker postponed it because of the pandemic.