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Illinois Lawmakers End Session With Tax Bills, Balanced Budget

Posted on June 5, 2019

Illinois’s legislative session ended in overtime, but lawmakers were able to ink last-minute tax bills that achieved Democratic goals, secured Republican priorities, and are being hailed as setting the stage for the state’s fiscal recovery.

Bipartisan negotiations led to the passage of a $40 billion balanced budget, a $45 billion transportation plan, and legislation that would effectively create a destination-based sales tax for remote sellers; phase out the franchise tax; and legalize, tax, and regulate recreational cannabis and sports betting. Add to that the legislature's recent approval of a constitutional amendment that would pave the way for a graduated income tax and a minimum wage increase — pending its final passage by the voters — and it’s no wonder lawmakers and pundits are quoting Democratic Gov. J.B. Pritzker’s announcement that “Illinois is back.”

“We started this session with an ambitious agenda. And there were skeptics. They said it couldn’t be done. Springfield doesn’t move that quickly. Our challenges are too large and our government too dysfunctional, they said,” Pritzker said in a June 2 press conference. “But what the skeptics failed to realize is that no obstacle can dwarf the transformative power of a state government and legislature that stands up for working families. And with that guiding principle, together, we just accomplished one of the most ambitious and consequential legislative sessions in this state’s history.”

S.B. 262, the 1,581-page budget bill, was approved by the Senate June 1 on a 40–19 vote along party lines after passing in the House May 31 on an 83–35 vote. The $40 billion spending plan notably adds a total of $375 million for K–12 education, which is $25 million more than required by the school funding formula.

The first-term governor’s balanced budget is a striking departure from the contentious political environment under former Gov. Bruce Rauner (R), who presided over a 793-day-long budget impasse.

“I think there was some natural reaction of enthusiasm, given the last few years of a budget stalemate. Doing anything is better than what happened under Rauner’s tenure,” Kerry Lester, editor at the Center for Illinois Politics, told Tax Notes on June 3. “This really did, on the books, end up being a productive session on both social and economic issues.”

Part of the secret to legislative success was a last-minute negotiation on business trade-offs in S.B. 689, which passed the House on a 107–9 vote and the Senate on a 49–8 vote. In a June 1 statement, House Minority Leader Jim Durkin (R) applauded the bill's creation of the Blue Collar Jobs Act, which would award up to $20 million annually in income tax credits for construction jobs. He also applauded the passage of legislation creating a data center tax credit for qualified purchases (capped at 20 percent of payroll); reinstating the manufacturer’s purchase credit, which exempts production-related tangible purchases from use taxes; and phasing out the state’s corporate franchise tax for foreign corporations by December 31, 2024, and for domestic corporations by December 31, 2025.

“Not only did we pass a bipartisan, balanced budget without any tax increases, but we also achieved significant business reforms for our communities that will boost the economy across our state,” Durkin said in a statement. “As I’ve said before, we can get great things done for Illinois families as long as we respect the principles and priorities of each caucus. In doing so, we have passed historic education reform, two bipartisan, balanced budgets and now important reforms that will grow jobs.”

Remote Seller Provisions

S.B. 689, along with provisions in S.B. 690, would also change the way the state collects sales taxes on remote sellers. Under the bills, the state would effectively no longer require remote retailers to collect the state's use tax as of July 1, 2020, but would require them to instead collect and remit a destination-based state and local retailers' occupation tax (ROT) using the same formulation as the state's current origin-based ROT.

The legislation would also require marketplace facilitators to collect and remit the state's 6.25 percent use tax on behalf of their sellers starting January 1, 2020. As of July 1, 2020, however, marketplace facilitators would be required to instead collect the ROT on behalf of their sellers. Marketplace sellers would be required to inform facilitators, such as Amazon, eBay, or Etsy, of the specific taxes due at the destination of their sale.

The state's current ROT, an origin-based tax collected on purchases made at brick-and-mortar stores in the state, is levied at 6.25 percent plus local taxes. According to estimates by the Illinois Retail Manufacturer’s Association (IRMA), the average rate is 8.74 percent. However, the ROT differs widely by jurisdiction and can be as high as 11 percent.

The association, which lobbied for the bills’ provisions, estimated that requiring remote sellers and marketplace facilitators to collect and remit the ROT would increase compliance significantly while raising $460 million in annual revenues.

The DOR "believes that they are on stronger ground because they are treating all bricks-and-mortar the same and all remote sellers the same," IRMA President and CEO Rob Karr told Tax Notes. "We're pleased the state has taken the step toward leveling the playing field."

However, the proposal has its critics.

“Switching to a destination-based ROT rule is not sensible to me, because the retailer’s occupation tax is imposed on the occupation of retailing,” Christopher Lutz, state and local tax attorney with Horwood Marcus & Berk Chtd., told Tax Notes. “There could be commerce clause problems, because the sourcing rules are different if you are an out-of-state seller rather than an in-state seller. . . . I would bet dollars to doughnuts that taxpayers will challenge it if it increases [the] rate for an out-of-state seller.”

Under S.B. 690, software vendors — referred to as certified service providers — such as Avalara or TaxJar could maintain a database for all local retailers’ occupation tax rates and provide tax compliance at no cost to remote sellers. The certified service providers would then be able to recoup 1.75 percent of the tax dollars collected.

The bill, which was approved by the Senate June 2 on a 46–10 vote and by the House June 1 on an 87–27 vote, also includes provisions on gambling and an increase in cigarette taxes. The bill would authorize sports betting, taxing it at 15 percent, and would allow for the creation of six new casinos, one of which would be in Chicago. Video gaming taxes would be increased from 30 to 33 percent on July 1, 2019, and to 34 percent on July 1, 2020. An earlier version included a sports betting “integrity fee” but it was ultimately dropped from the bill.

The bill would increase the state’s cigarette tax from $1.98 per pack to $2.98 per pack and tax e-cigarettes at 15 percent. It would also create a parking excise tax, levied at 6 percent on the purchase price for an hourly, daily, or weekly parking permit and at 9 percent on the purchase price for a monthly or annual permit.

Infrastructure, Pot, and Income Tax Bills

H.B. 3096, the state’s infrastructure plan, would invest $45 billion into capital construction — the first such bill in a decade. The plan would increase the motor fuel tax from 19 cents per gallon to 38 cents per gallon on July 1 and index it to inflation for each subsequent year. Vehicle registration fees would increase from $98 to $148 annually and electric vehicle registration fees would be increased to $248. The bill was approved by the Senate May 31 on a 39–19 vote after being approved 113 to 0 in the House April 11.

Lawmakers also passed H.B. 1438, which would legalize recreational marijuana and tax cannabis at graduated potency rates: 10 percent on the purchase price of cannabis at or below a 35 percent THC content, and 25 percent on the purchase price of cannabis with a THC content above 35 percent. Medical patients will be permitted to possess up to five cannabis plants taller than 5 inches. The bill was approved in the House May 31 on a 66–47 vote after the Senate approved it May 29 on a 38–17 vote.

Also approved during the flurry of last-minute votes was S.B. 687, which would set the rates and brackets for a graduated income tax if voters in November 2020 approve a constitutional amendment that would remove language in the state constitution that prohibits such a tax. The bill would create six separate brackets on income, ranging from 4.75 percent for individual filers with annual incomes up to $10,000 to 7.99 percent on single-filer incomes over $750,000 ($1 million for joint filers).

According to Pritzker, 97 percent of families will pay the same or less in taxes and the tax would generate approximately $3.4 billion in annual revenue. 

With a balanced budget and the potential for future revenue if voters approve the graduated income tax, it would seem the Pritzker administration is on good footing to start repairing the state's finances. Credit rating analysts gave initial praise for the budget and infrastructure plan but signaled caution, Reuters reported.

Lester, of the Center for Illinois Politics, said Pritzker showed political wisdom early on by bringing in Republican leaders on several issues, despite Democrats having the majority in both chambers of the legislature.

“It’s an impressive start. He’s still in a honeymoon period, and you are starting to see a few fissures in dealing with minority caucuses,” Lester said. “We’ve had some strong and long-standing personalities leading down there. With Pritzker, he is a Democrat and controls the purse strings of the Democratic Party, and that will add some pressure for leaders in his party to bow to his wishes.”

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