SPRINGFIELD – Members of an Illinois Senate committee sparred with officials from Gov. JB Pritzker’s administration Friday in a hearing on tax changes proposed by the governor in an effort to balance the state’s budget for the 2022 fiscal year.
The Senate Revenue and Appropriations committees held the joint hearing, questioning the directors of the Illinois Department of Revenue and the Governor’s Office of Management and Budget among others.
In his budget proposal released in February, Pritzker outlined nine changes to the corporate tax code meant to generate $932 million in revenue for the state in order to maintain a balanced budget while keeping income taxes and government spending flat for FY 22, which begins July 1.
“The governor’s budget proposal is a reasonable and balanced one,” IDOR Director David Harris told lawmakers. “Were it to be enacted as (Gov. Pritzker) proposed, there would be a $120 million surplus at the end of FY 22 by estimate.”
The largest change in terms of building revenue would be a cap on how much corporations can deduct from their taxes based on their losses in a given year. Under current tax law a corporation can take their net operating loss and reduce how much of their income is taxable in future years by that amount.
Pritzker’s proposal would cap this deduction to $100,000 annually for the next three years, which IDOR estimated would save the state $314 million in FY 22.
Harris told lawmakers that the state’s 2,800 corporate taxpayers deducted $6.4 billion in net operating losses from their taxes in 2018. Just 84 of those corporate taxpayers that year accounted for $3.5 billion in operating losses.
“My point there is the biggest percentage of (net operating losses) are enjoyed by a very small number and that means that the overwhelming majority of corporations are not going to be impacted by this,” he said.
While the Pritzker administration has referred to the changes as “closing corporate tax loopholes,” three of the nine tax codes being removed or amended as part of the proposed budget were put into place by Pritzker as part of budget negotiations with state Republicans in 2019.
A phased repeal of the corporate franchise tax, an addition to what properties qualify for the state’s machinery and equipment sales tax exemption, and a tax deduction for creating new construction jobs in the state were added to the budget proposal put forth by Pritzker in 2019 to secure Republican support.
All three provisions would be delayed or removed in the governor’s plan in order to generate approximately $102 million in savings for FY 22
That third provision, branded as the Blue Collar Jobs Act, was meant to go into effect Jan. 2021. At the time of its passage, the bill was touted by both Pritzker and Republicans as a tax credit that would bring more jobs and businesses to Illinois.
However, the construction worker tax credit had its implementation delayed by Pritzker, who cited losses in tax revenue due to the coronavirus pandemic.
Sen. Chapin Rose, R-Mahomet, questioned Alexis Sturm, the governor’s budget director, on why a program passed with bipartisan support needed to be cut if the state expected a surplus.
“Here we are at the end of COVID with Illinois as one of the top states in the nation for unemployment, people desperately needing work,” he said. “Why on earth did the administration— did Governor Pritzker— decide, he’s now going to back out, back out of, back down from, go back on, his word, his pledge, when he signed the Blue Collar Jobs Act?”
Democratic Sen. Linda Holmes, of Aurora, echoed his concerns.
“I kind of hesitate, wondering if that is almost a bit of a poison pill here, when we talk about eliminating some recent tax changes,” she said.
According to Sturm, the state’s short-term fiscal situation looked positive due to loans and an influx of funds from the federal government as part of several coronavirus relief packages passed in the last year. But for long-term stability, there were hard choices that had to be made regarding the tax code.
“Illinois has struggled with a persistent budget deficit for the last few years, many years. These are changes more permanent in nature that would go to try to address some of the underlying structural challenges of the state’s budget,” Sturm said.
Other corporate tax changes that raised concerns at the hearing are the reduction of a tax credit for individuals and businesses that contribute to private school scholarships, a cap on the reimbursement retailers receive from collecting sales tax, and the expiration of a sales tax exemption for biodiesel fuel.
Multiple business organizations submitted either oral or written testimony against the proposals, including the Illinois Manufacturers’ Association, the Taxpayers Federation of Illinois and the Illinois Retail Merchants Association.
Chicago Democratic Sen. Elgie Sims, who chaired the hearing, said he heard “a large discussion this morning as if this is a one-year solution,” and offered support for the budget’s long-term goal of financial solvency.
“If there are other proposals, we certainly look forward to see, but these are the proposals as put forth by the governor,” he said.
Greg Cox, of the Illinois Soybean Growers Association, said he appreciated the difficulty of Sturm’s position since “she was given a task to build a budget with no general tax increases and with flat spending,” but that there would be serious policy implications for cutting the exemption for biodiesel fuel.
Those implications are increased air pollution as more petrol and less biodiesel would be used in fuel blends and the potential loss of 2,000 jobs tied to the biodiesel fuel industry in Illinois, which is the nation’s largest soybean producer.
He also presented Senate Bill 2394, submitted by the Growers Association, through Essex Democrat Sen. Patrick Joyce, as a compromise that would still gradually eliminate the tax credit and save the state money.