Tax Highlights of Proposed Illinois “Grand Bargain”
In an effort to resolve Illinois’ 20-month budget impasse, the Illinois Senate leadership (Senate Majority Leader John Cullerton and Senate Minority Leader Christine Rodogno) have jointly proposed a series of bills to increase revenue, reduce spending, and respond to the Illinois Governor’s concerns regarding pension reforms, workers compensation reform and property tax relief. A series of twelve bills have been introduced, all of which are interlinked for passage. The bills are termed the Illinois “Grand Bargain.” Most of the tax-related changes are found in Senate Bill 9. The current version of the Senate Bill 9 (Amendment 3) (“Bill”) was submitted on March 3 and includes the following proposed changes:
Income Tax. The Bill proposes to increase income tax rates, effective January 1, 2017 to 4.99% for individuals, trusts and estates, and 7% for corporations. Other income tax-related features of the Bill include the elimination of the non-combination rule (except for insurance companies) and an expanded definition of “United States.” In addition, the Bill decouples from the federal domestic production activities deduction.
Tax Credits. The Bill would expand and make permanent the research and development tax credit. The education expense credit is increased from $400 to $750, and the earned income tax credit is increased from 10% to 15%. The Bill also extends the live theater production tax credit and creates a credit to teachers for instructional materials and supplies.
Sales Tax Base Expansion. The Bill would expand the Illinois sales tax base to include certain services, effective January 1, 2018. The Retailer’s Occupation Tax Act, the Use Tax Act, the Service Occupation Tax Act and the Service Use Tax Act are all amended to tax the following services: charges for storage, repair and maintenance services, landscaping services, laundry and dry cleaning services, cable television services (including video and audio streaming and direct broadcast satellite services), private detective and security services, structural pest control services and personal care services (including nails and hair removal, but not haircuts or hair coloring). The services are taxed at the rate of 6.25% of the selling price or the market value of the service. In addition, the Bill amends certain local tax enabling statutes to permit local units of government to tax the same services.
The Bill also expands the manufacturing, machinery and equipment exemption to include production-related tangible personal property, and it incorporates the graphic arts exemption into this exemption. It also reduces LLC registration fees.
False Claims Act. As noted in a previous blog post, Senate Bill 9 amends the Illinois False Claims Act to exclude the use of the Act for tax-related claims.
Proposed Amendments Dropped from Current Version. Prior versions of the Bill proposed to eliminate the Illinois Franchise Tax, and to enact an annual Business Opportunity Tax, based on payroll, that ranged from $225 to $15,000. Both changes were dropped from the current version of the Bill.
Other Components of Grand Bargain. Other components of the “Grand Bargain” include school funding reform (Senate Bill 1), a change to the gaming laws to change sourcing from state of residence to where the earnings are won (thereby facilitating tax on out-of-state residents gambling in Illinois) (Senate Bill 7), a property tax freeze (Senate Bill 13) and pension reform (Senate Bill 16).
It’s difficult to predict whether the Grand Bargain will succeed in this or any other form. To date, the Senate has not passed any of the above-referenced Bills. The Bills in the Grand Bargain that have been passed by the Senate (a local government consolidation plan, easing government purchasing rules and a low-cost municipal borrowing measure) were passed by Democrats without any Republican support. Although the Governor’s Office included a $4.572 billion line item in its FY 2018 Budget entitled “working together on ‘grand bargain,’” it is not clear that the Governor’s Office supports this package of bills. The Illinois House of Representatives has not yet voted on any of the proposals and its leadership is not voicing support.