On February 17, 2021, Illinois Gov. J.B. Pritzker released his proposed budget (the Pritzker Budget) for the 2022 fiscal year.1 To help close a nearly $3 billion projected deficit, the Pritzker Budget proposes to reduce or eliminate various so-called “corporate loopholes” — certain tax breaks and incentives provided for under current law — including imposing temporary limitations on the deductibility of net operating losses (NOLs), decoupling from the federal treatment of foreign-source dividends and so-called global low-taxed intangible income (GILTI), and reversing the repeal of the universally reviled Illinois franchise tax.
During 2020, the governor backed an unsuccessful ballot measure to amend the state constitution and authorize a graduated income tax to generate revenue intended to address the state’s fiscal woes. Throughout the election season, he warned that the measure’s failure would force deep cuts or an across-the-board income tax increase. Nonetheless, the Pritzker Budget does neither. Rather, it relies on a mix of spending reductions and eliminating or limiting various tax breaks and incentives, including ones that he agreed to as part of a 2019 bipartisan budget deal for the 2020 fiscal year (the 2019 Agreement).
Pritzker’s Proposed Tax Changes — Initial Observations and Questions
- Temporary cap on corporate NOLs (estimated to generate $314 million). The Pritzker Budget proposes, for the next three tax years, to limit the amount of NOLs that can be deducted in any tax year to $100,000. The Pritzker Budget estimates that 80% of Illinois corporate income taxpayers with NOLs will not be affected by the limit. The Illinois Department of Revenue (the Department) has indicated that restricted NOLs will be allowed to be carried forward for use in future years. Thus, this proposal effectively results in an interest-free loan from Illinois corporate taxpayers for the next three years.2
- Reverse repeal of corporate franchise tax (estimated to generate $30 million). The Pritzker Budget proposes to cancel the phaseout of the Illinois corporate franchise tax, one of the most loathed taxes of Illinois corporate taxpayers. The Governor previously agreed to a gradual phaseout of the franchise tax as part of the aforementioned 2019 Agreement.
- Rollback of TCJA 100% foreign-source dividend deduction and 50% deduction for GILTI (estimated to generate $107 million). The Pritzker Budget proposes to decouple from the federal deductions for foreign-source dividends and GILTI. Instead, the Pritzker Budget proposes to permit corporate taxpayers to take advantage of the deductions authorized under Section 243 of the Internal Revenue Code for domestic dividends.
- Eliminate Blue Collar Jobs Act (estimated to generate $16 million). The Pritzker Budget proposes to eliminate the Blue Collars Jobs Act, a program created as part of the 2019 Agreement to spur investment and create well-paying blue-collar jobs in Illinois. The program was set to take effect January 1, 2021, but the Governor previously froze the program, citing COVID-19 pandemic revenue losses.
- Restrict manufacturing machinery and equipment sales tax exemption (estimated to generate $56 million). As part of the fiscal year 2020 budget, the manufacturing machinery and equipment exemption was modified to include production-related tangible personal property (which previously was exempted under the Manufacturer’s Purchase Credit, which sunset in 2014). The Pritzker Budget reverses that modification so that production-related tangible personal property would no longer be exempted.
- Decouple from TCJA accelerated depreciation (estimated to generate $214 million). Under the TCJA, purchasers of capital assets are permitted to expense the entire cost of the capital assets in the year the asset is placed in service (rather than depreciate the cost over several years). The Pritzker Budget proposes to decouple from this accelerated (or bonus) depreciation and instead permit taxpayers to depreciate the cost of the asset over the schedule that would otherwise be permitted under Section 168 of the Internal Revenue Code (ignoring the TCJA’s acceleration provisions). Because this proposal would simply defer, and not eliminate, depreciation deductions, this proposal also effectively results in an interest-free loan from Illinois businesses.
- Limit retailers’ discount on sales tax collection costs (estimated to generate $73 million). Like many states, Illinois permits retailers to retain a percentage of sales taxes collected from customers as a reimbursement for costs retailers incur in collecting and remitting the taxes to the state. The Pritzker Budget proposes to cap this discount at $1,000 per month. By capping the discount at a flat $1,000 per month (regardless of the size of the business or amount of tax collected and remitted), the proposal ignores the fact that larger businesses with higher sales volume have significantly increased collection and remittance costs.
- Eliminate sales tax exemption on sales of biodiesel (estimated to generate $107 million). Currently, certain types of biodiesel blends receive a full sales tax exemption. The Pritzker Budget proposes to fully eliminate any sales tax exemption for biodiesel.
- Limit credit available under Illinois Tax Credit Scholarship Program (estimated to generate $14 million). The Illinois Tax Credit Scholarship Program (known as the Invest in Kids Act) was enacted in 2017 to encourage donations to fund scholarships for children meeting certain income requirements to attend qualified, nonpublic schools. The program affords a 75% state income tax credit for qualified contributions to certain scholarship-granting organizations, provided the donor does not claim any portion of the contribution as an itemized deduction on their federal income tax return. The program is scheduled to sunset on January 1, 2024. Under the Pritzker Budget, the state income tax credit for qualified contributions for the remaining years of the program would be reduced to 40%, but donors would be permitted to claim the contribution as an itemized deduction on their federal return.
While the Pritzker Budget proposals may not all ultimately become law, Illinois corporate taxpayers should, together with their tax advisers, carefully consider and plan for the impact of these and other potential changes on their businesses. In light of the ongoing budget pressures, and the state’s significant unfunded pension liabilities, the Governor will need to continue to limit spending and find new sources of revenue to balance the state’s budget.
1 A copy of Gov. Pritzker’s proposed fiscal year 2022 Illinois state budget is available at www2.illinois.gov/sites/budget/Documents/Budget%20Book/FY2022-Budget-Book/Fiscal-Year-2022-Operating-Budget.pdf.
2 During the most recent legislative veto session, Gov. Pritzker and fellow Democrats in the Illinois General Assembly attempted to pass legislation that would have decoupled from certain taxpayer-favorable temporary modifications made by the Coronavirus Aid, Relief and Economic Security (CARES) Act to NOL restrictions that were originally enacted as part of the Tax Cuts and Jobs Act (TCJA). Although the Pritzker Budget makes no mention of this decoupling effort, we understand that decoupling from these CARES Act modifications is likely to remain a legislative priority during the spring legislative session.
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