Income Tax Hikes Could End Fiscal Crisis for Illinois

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By Michael J. Bologna

Illinois could be headed for a massive rewrite of its tax code—including higher personal and corporate income taxes, a new tax on sugary beverages and the closure of three corporate tax breaks—under bipartisan revenue legislation introduced in the Senate.

Senate President John Cullerton (D) and Minority Leader Christine Radogno (R) on Jan. 9 released details of a long-awaited plan for ending the state’s 18-month budget crisis. The proposed global solution, addressing a long list of polarizing issues including taxes, unfunded pension liabilities, minimum wages, and paying off $11 billion in unpaid bills and gambling, would include more than $5.6 billion in new revenue generated primarily though income taxes.

A spokesman for Cullerton said the Senate Assignments Committee is reviewing the package of 10 bills, which may head to the Senate floor late Jan. 9.

While passage in the Senate is a strong possibility, given support from both the Democratic and GOP leaders, it was unclear how the package would play out in the coming days.

The Illinois General Assembly is in a two-day lame-duck session. Even assuming passage in the Senate, insiders doubted the House could act on the proposals before a new class of lawmakers is sworn in on Jan. 11.

Taxes Headed Higher

Critical features of the tax code changes include:

  •  the personal income tax rate would be raised to 4.95 percent from 3.75 percent, generating $4.1 billion annually;
  •  the corporate rate would be bumped to 7 percent from 5.25 percent, generating $577 million;
  •  a penny-per-ounce tax on sugar-sweetened beverages would be imposed, collecting $560 million annually;
  •  the domestic production deduction would be eliminated by decoupling from the federal regime;
  •  deductions for dividends received by a corporation from subsidiaries would be eliminated; and
  •  the noncombination rule, which prohibits unitary companies that use different apportionment formulas from filing a single return, would be eliminated.

Few Tax Cuts

In addition, Cullerton and Radogno are proposing several modifications to existing tax credit and fee programs. The changes include:

  •  elimination of the corporate franchise tax effective July 1, 2017;
  •  reinstatement of the expired research and development tax credit for businesses;
  •  a 50 percent increase in the state Earned Income Tax Credit;
  •  a bump in the cap on Education Expense Credit from $500 to $750;
  •  a new $250 tax credit for teachers who spent their own money on classroom supplies;
  •  extension of the Film Tax Credit to Jan. 1, 2027; and
  •  substantial cuts in business filing fees.

In addition, the package includes creative solutions to a whole host of problems vexing the state. The plan includes a six-month budget funding state government through the end of the fiscal year. Illinois hasn’t had a traditional budget since June 30, 2015.

The plan includes legislation overhauling Illinois’ woefully underfunded public retirement systems. The changes could save the state up to $1 billion annually. Another bill would raise Illinois’ minimum wage to $11 per hour in five steps by Jan. 1, 2020.

Political Environment

On top of the prospects for passage before the new Legislature gavels in, the reactions of Republican Gov. Bruce Rauner and Democratic House Speaker Michael Madigan were also in doubt. Madigan has been silent on the announcement, and Rauner said he knew very little about the Cullerton/Radogno package.

“I don’t know what’s true and what’s not,” Rauner told reporters Jan. 9. “What I’m heartened by is that Democrats and Republicans in the Senate are working together and really having serious discussions.”

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

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