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Illinois: Special Joint Committee Recommends Changes to the State Tax Code to Attract More Businesses




by:
McDonald Hopkins LLC - Cleveland Office

 
June 25, 2014

Previously published on June 19, 2014

The Tax Policy Subcommittees of the Illinois General Assembly’s Joint Revenue & Finance and State Government Administration Committees (the “Joint Committees”) recommended a number of changes to the Illinois tax code in a joint report (the “Report”) issued on May 28, 2014. Cutting the corporate income tax rate and repealing the corporate franchise tax were among the recommendations in the Report.

The Joint Committees’ purpose is to review the Illinois tax code and find ways to improve the state’s business climate. The Report offered various ways to modernize the Illinois tax code in this regard.

Although the Report analyzed many state tax policies, it recommended changes only to a small number of them. The policies that did not garner enough consensuses did not receive an official recommendation. The Report analyzed the Illinois tax code and the state’s current business climate, in addition to other states’ tax policies, in making its recommendations.

The State Corporate Income Tax recommendation

Among the many topics discussed in the Report was Illinois’ corporate income tax. Currently, the state’s corporate income tax rate is 7 percent. Starting Jan. 1, 2015, the corporate income tax rate is scheduled to decrease to 5.25 percent. Governor Pat Quinn and other Democrats, however, are starting to call for the rate to remain at 7 percent via an extension of the tax increase.

The Report recognized the competing interests exist regarding cutting the corporate income tax rate. A major issue facing such a cut, as the Report explained, is balancing of business growth and job creation with the reduction of vital services that the state would no longer be able to provide with the cut. Future debate on this matter will likely revolve around a balancing of these factors.

The Report concluded that the current rate of 7 percent could be reduced, but did not specifically recommend an alternative tax rate. The opinion of the interested parties claimed the rate should be reduced, citing competitiveness concerns.

The State Corporate Franchise Tax recommendation

Although no consensus was reached regarding how to replace revenue from the corporate franchise tax, the Report did recommend repealing the tax. The Report stated that the franchise tax was “outdated and not well administered.” This conclusion is not surprising as the corporate franchise tax is a product of an Illinois law that is over thirty-years old and the Illinois Secretary of State does not have the authority to conduct full audits of companies to determine compliance with the tax.

Although the Report did not recommend how to replace revenue from the corporate franchise tax, it contained some suggestions in the event the tax remains:

  1. Make the corporate franchise tax apportionment formula consistent with the corporate income tax formula so that it is less burdensome on businesses striving to comply with its requirements

  2. Allow investors to not include the treasury stocks of a corporation when determining an investor’s paid-in-capital (the corporate franchise tax is calculated based on an investor’s paid-in-capital)

  3. Provide the state with better enforcement mechanisms to collect the corporate franchise tax

Other discussed changes to the Illinois tax code

The Report also discussed additional recommendations regarding other provisions of the Illinois tax code. Such recommendations included:

  • Changing the eligibility requirements to obtain the research and development income tax credit. The current tax credit is awarded to businesses that engage in qualified research activities in Illinois. One such suggested change to the eligibility requirements is to mirror them after the federal research and development income tax credit requirements.

  • Maintaining the earned income tax credit but making changes to it regarding when it is paid out and the potential for a refund of the tax credit. Although these changes were discussed, no consensus was reached.

  • Restructuring the tax code to promote investment in data centers, although there was not a consensus on specific solutions.

  • Considering combining the manufacturer’s purchase credit with the manufacturing, machinery, and equipment exemption.

  • Modernizing the sales tax to encompass service industries within the state.

  • Reducing initial filing fees for limited liability companies. Although no consensus was reached regarding other limited liability company fees, the Report did indicate that the Joint Committees would consider reducing them in the future.

It is not clear whether the Illinois legislature will adopt any of the recommendations or what taxes the Joint Committees will consider in the future. However, the Report may be used as an impetus for change, especially as debate over various tax rates in Illinois begins to heat up.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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