Illinois Senate Supports $5.5 Billion Tax Hike

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By Michael J. Bologna

The Illinois Senate voted to raise taxes after almost two years of fiscal calamity, hoping to generate $5.5 billion with higher taxes on income, streaming television services, dry cleaning, tattoos, and body piercings.

Senate Democrats passed S.B. 9 by a 36-26 vote late May 23, without any support from Republicans. The bill would raise badly needed revenue for Illinois, which faces $13 billion in unpaid bills and $130 billion in unfunded pension liabilities.

The revenue measure was the final piece of a proposed $37.3 billion budget for fiscal year 2018, after action on a series of appropriation and government reform bills. The Senate Democrats’ so-called “grand bargain” revenue and spending package, assuming full enactment, would mark the first real budget for the state in almost two years.

S.B. 9 and the rest of the grand bargain, however, faces considerable hurdles.

The bill could be modified in the House, but it confronts a more difficult fate in front of Gov. Bruce Rauner (R). Earlier May 23 Rauner said he wouldn’t sign any revenue bill that doesn’t also impose a long-term freeze on property taxes. S.B. 9 is silent on that issue.

“The biggest issue that now stands in the way of us reaching an agreement is resistance to freezing your property taxes, and giving you the ability to control whether your property taxes go up or down in the future,” Rauner said in a statement.

Lukewarm Reception

House Speaker Michael Madigan (D) offered a lukewarm response to the Senate’s plan, saying only the grand bargain package would be “thoughtfully considered by the House Democratic Budget Working Group.”

Senate President John Cullerton (D) told reporters after the floor vote that he had no idea how the revenue and spending proposal would be received by the governor and the House leadership. He acknowledged more work might be necessary, particularly with regard to property taxes.

“I’d be happy to sit down and work” with Rauner and “continue to compromise,” Cullerton said.

S.B. 9 would raise the bulk of the $5.5 billion through a hike in the income tax. The corporate rate would be bumped to 7 percent from 5.25 percent, generating $514 million. The personal income tax rate would be raised to 4.95 percent from 3.75 percent, generating $4.45 billion annually.

Another $81 million in income taxes would be generated by limiting the use of the personal exemption, the property tax credit and the educational expense credit. Individuals earning more than $250,000 and joint filers earning more than $500,000 would no longer be eligible for the exemptions.

Whistle-Blower Reforms

S.B. 9 also seeks to solve an ongoing problem with the False Claims Act, specifying that the law “does not apply to any taxes imposed, collected or administered by the State of Illinois.” The state’s law has been criticized for creating a virtual cottage industry of small-stakes whistle-blower lawsuits seeking damages for minor violations of the sales and use tax.

Three corporate tax “loopholes” would be closed, raising $125 million per year. S.B. 9 would eliminate the domestic production deduction by decoupling from the federal regime. The noncombination rule, which prohibits unitary companies that use different apportionment formulas from filing a single return, would be eliminated. And the bill would eliminate the so-called “outer continental shelf” exemption.

A new feature of the legislation would establish a franchise tax to collect $54 million on subscriptions to cable, satellite and streaming television services. A previous version of the tax bill structured the so-called “Netflix tax” as a sales tax and sought revenue of $46 million.

Taxing Services

S.B. 9 calls for another $55 million annually by expanding the sales tax base to certain services, including:

  •  laundry and dry-cleaning—$4 million;
  •  storage (cars, boats, property)—$18 million;
  •  pest control—$4 million;
  •  private detective, alarm and security services—$5 million; and
  •  tattoos and piercings—$16 million.

S.B. 9 was revised from a version floated last week. The version passed by the Senate removes language imposing the sales tax on landscaping services, and auto repair and maintenance services. The bill also removes an $83 million scheme capping the retailer’s rebate at $1000 per month. For decades, Illinois retailers have been permitted to retain a small percentage of the sales tax collected from consumers.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of S.B. 9 is at http://src.bna.com/pbd.

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