Illinois General Assembly 

The House and Senate were scheduled to be in session this week from Tuesday May 8 through Friday May 11.  The House and Senate cancelled the Friday session day.

Next week, the House and Senate are scheduled to be in session from Tuesday May 15 through Friday May 18.

Thus far, there has been little discussion of tax issues. Both the House and the Senate Revenue committees have, generally, avoided any discussion of substantive tax legislation. 

There are a number of reasons for the lack of action on  tax-related legislation.  First, there is a bit of what I would call "tax hangover" from last year's tax increase legislation.  Second, there has been little activity on the budget. With the exception of property tax legislation, most tax-related legislation has some impact on state revenues and, hence, on the budget.  Third, it is an election year so members of the General Assembly on both sides of the aisle are hesitant to deal with any legislation that could give ammunition to their opponents.

Predictions for the remainder of the session

I do have some predictions for what may happen with respect to taxes during the remainder of the session.  I hope my predictions are wrong.

The budget for the current fiscal year, even with the tax increase, was "balanced" by use of revenues from fund-sweeps and inter-fund borrowing.  So, it appears that the discussions are beginning with a deficit. 

The Governor and the four legislative leaders met earlier this week.  It appears that discussions about the budget are moving slowly.  

The post-meeting discussion by the Governor and the two Republican leaders with the press focused on the need for a revenue estimate as an essential, and initial, part of the budget process.  

Speaker Madigan did not speak with the press after the meeting.  Senate President Cullerton spoke with the press after the meeting.  The Senate President doesn't agree with the Republicans that there is a need for an agreement on a specific revenue number as a prelude to finalizing a budget agreement.

In response to questions about possible sources of additional revenues to finalize the budget, Senate President Cullerton indicated that "there are some things like federal tax law changes where we could make some modifications to bring in additional revenue." 

As a result, I predict that as part of a budget proposal from the Democrats, we will see an attempt to decouple from business-friendly aspects of federal tax reform that flowed through to Illinois.  Specifically, I anticipate an attempt to decouple from 100% expensing.  

According to the Illinois Department of Revenue estimates, 100% expensing results in an Illinois income tax revenue reduction of between $113 and $133 million for the current fiscal year, FY 2018, and between $365 and $406  million for FY 2019 - the fiscal year beginning July 1. (These numbers include both the "regular" income tax and the personal property tax replacement income tax.)  Keep in mind that 100% expensing vs. depreciation deductions is a matter of timing - the full cost expense when the item is placed in service vs. over the useful life of the item.

There could also be an attempt to obtain additional one-time revenues by taxing the deemed repatriated income taxed at the federal level.  As you know, in the case of corporations most of this income is not subject to Illinois income taxation because of the dividend subtractions in the Illinois Income Tax Act.  In order to tax this income at the state level, there would need to be a retroactive repeal of the subtractions to pick up the income subtracted during the 2017 tax year.  I don't have an estimate of the potential fiscal impact of such a change but I suspect it could be significant. 

Attempting to tax repatriated income would be complicated and controversial.  The Illinois income tax rate on some of the repatriated income would be higher than the federal tax rate (The federal tax rate is either 8% or 15.5% on such income.).  The issue of retroactivity would likely be litigated. There is also the issue of factor representation if the income is taxed and I suppose even a possible issue of business vs. nonbusiness income with respect to the deemed repatriated amounts. Additionally, at the federal level, taxpayers are granted the option of making payments over 8 years. In contrast, Illinois would likely want all of the revenue paid at once.

Legislation passed this week:

SB 3141  - passed the Senate this week. This bill is an initiative of the Illinois Department of Revenue.  The bill a mends the Use Tax Act, the Service Use Tax Act, the Service Occupation Tax Act, the Retailers' Occupation Tax Act, the Cigarette Tax Act, and the Cigarette Use Tax Act. The legislation sets forth penalties for failure to keep or produce certain books and records. Requires distributors and secondary distributors who purchase cigarettes for shipment into Illinois from a point outside this State to make the invoices available for inspection upon demand by a duly authorized employee of the Department. Provides that the Department may assess taxes, penalties, and interest on original packages of cigarettes that do not contain property tax stamps. Provides that, if a person fails to produce records for inspection by the Department upon request, a prima facie presumption shall arise that the person has failed to keep the records so required. Provides that the sale of individual or loose cigarettes is prohibited. Amends the Tobacco Products Tax Act of 1995 to make changes concerning penalties for failure to keep and produce books and records. As amended, the bill (1) removes provisions providing that the taxpayer may not introduce books and records into evidence unless the books and records are received by the Department of Revenue no less than 5 business days prior to seeking introduction of the books or records; and (2) in provisions concerning penalties for failure to produce books or records, removes specific language concerning officers or directors of corporations, partners or members of partnerships, and managers or members of limited liability companies; and (3) makes other technical corrections. 

Revenue committees

The Senate Revenue committee met this week on Wednesday.  Here is a link  to the bills that were posted for committee consideration.  Of note is  HB 4237  the legislation that is designed to provide a "work around" to the federal $10,000 SALT deduction cap.  HB 4237 was posted, but was not called for a vote this week.

As of this morning, the Senate Revenue committee has not scheduled a hearing for next week.

The House Revenue committee did not meet this week.

The House Revenue committee is scheduled to meet next week on May 17. Here is a link to the bills that have been posted for committee consideration next week.  At this time, it is unclear as to which of these bills will actually be considered by the committee.

SB 2604 - the Illinois Chamber Tax Institute initiative to amend the Uniform Penalty and Interest Act has been posted for House Revenue committee consideration.  This legislation passed the Senate unanimously. The bill caps the regular underpayment under the UPIA at 15% (from the current 20% maximum) and also provides for an automatic abatement of any underpayment penalty that would otherwise be impose if, upon audit, the Department of Revenue determines that a taxpayer paid at least 955 of the total tax liability prior to the initiation of the audit.

Court Cases

Two cases of note are scheduled for oral argument before the Illinois Supreme Court on May 22. Here is a link to the Supreme Court website where you can find the briefs filed with the court in each case.

Oswald v. Beard involves a challenge to Section 15-86 of the property tax code which provides a property tax exemption to certain not-for-profit hospitals and their hospital affiliates.  The legislation was enacted after the decision in Provena Covenant Med. Ctr. v. Department of Revenue, 236 I..2d 368 (2010)  

Oswald challenged the facial constitutionality of the charitable property tax exemption.  The Circuit court rejected the challenge and the appellate court affirmed the determination of the circuit court.

People ex rel. Schad, Diamond & Sheddon, P.C. v. My Pillow Inc. deals with the scope of the attorneys' fees provision in the Illinois False Claims Act.  This case is an appeal of an appellate court decision that held that the Relator, Mr. Diamond, was not entitled to attorneys' fees under the False Claims Act in a case in which he represented himself.  

The Illinois Chamber of Commerce filed an amicus brief in My Pillow urging the court to uphold the decision of the appellate court.  The Chamber was represented by Illinois Chamber Tax Institute law firm Horwood Marcus & Berk.

Publications

The Civic Federation released its Analysis and Recommendations of the Governor's State of Illinois FY2019 Recommended Operating and Capital Budgets. If you wish to dig into the details of the budget, I recommend reviewing this analysis.

Rulemaking