This Week in Springfield – 101-07

IN THIS ISSUE:

GRADUATED INCOME TAX
PROPERTY TAX
PLASTIC BAG TAX ADVANCES
E-CIGARETTES INCLUDED IN ILLINOIS SMOKE FREE ACT

This Week in Springfield both the House and Senate were in session and focused on committee work.  A plastic bag tax passed committee, Cook County Assessor Fritz Kaegi’s bill to assess value of a property based on its income passed the committee stage, and Governor Pritzker outlined the structure of the Progressive Income Tax for the Caucus leaders.

GRADUATED INCOME TAX

Throughout the general election campaign last year, then-candidate JB Pritzker advocated for the need for Illinois to amend its constitution to scrap the current flat-tax and, instead, allow the state to create and impose a graduated income tax. Throughout the campaign, he avoided questions as to what rates he would suggest repeatedly stating that such rates had to be negotiated with the Assembly. Today, the Governor’s Office released their suggested plan although the plan was not negotiated with the leaders – at least to this point.

According to the Governor’s Office, 97.2% of state income tax payers would not experience an income tax increase. Here is an overview of the proposal as it relates to income tax rates:

Adjusted Gross Income Marginal Rates %  of impacted taxpayers
$0 – $10,000 4.75% 27.20%
$10,001 – $100,000 4.90% 58.90%
$100,001 – $250,000 4.95% 11.10%
Total % of Taxpayers 97.20%

 

Here are the details on the 2.8% of state income tax payers who would experience an increase:

Adjusted Gross Income Marginal Rates %  of impacted taxpayers
$250,001 – $500,000 7.75% 1.90%
$500,001 – $1,000,000 7.85% 0.60%
over $1,000,000 7.95% 0.30%
Total % of Taxpayers 2.80%

 

Additionally, the Corporate Income Tax (CIT) rate would be set at 7.95%. Today, the CIT rate is currently 7.00%.

None of these rates include the Personal Property Replacement Tax (PPRT). Corporations pay an additional 2.5% on income meaning the effective CIT would be 10.45%. For pass-through entities (partnerships, trust, and S-Corps), the PPRT is 1.5%. That 1.5% is paid off the top from the federal Form 1065 Schedule K. Remaining monies are then distributed to partners who pay at the individual rate. Nevertheless, this plan will hit pass-through entities harder.

Let’s consider a few examples. First, let’s assume a single or joint filer with an adjusted gross income of $600,000.

Adjusted Gross Income $600,000
Tax on $500,000 @ 7.75% $38,750
Tax on $100,000 @ 7.85% $7,850
Total Income Tax Paid $46,600
Effective Rate 7.77%

Second, let’s assume a single or joint filer with an adjusted gross income of $1,000,000. This filer pays 7.95% (the top individual rate) on the entire amount for a total of $79, 500. That would be $30,000 more than they would pay today or 60.6%.

Finally, here is an example of how a corporation would be taxed under this plan:

Adjusted Gross Income $2,000,000
7.95% tax $159,000
2.5% PPRT $50,000
Total Income Tax Paid $209,000
Effective Rate 10.45%

These proposed rates would give Illinois the second highest income taxes on corporations in the nation behind only Iowa. In terms of personal income taxes, Illinois would be 7th highest in the nation for both the highest lowest rate (4.75%) and for the highest rate (7.95%). Again, it is not possible at this writing to calculate the impact on pass-through entities but they will certainly pay more.

There are a few proposed changes to credits as well. First, the Governor is proposing a 20% increase in the current property tax credit from $500 million to $600 million. Second, he is including a proposed $100 per child tax credit. For single filers the child credit is for those under $80,000 per year, but it phases out starting at $40,000. For joint-files, the child credit is for those under $100,000 per year but it starts phasing-out at $60,000.

The Governor’s Office estimates the net revenue from this proposal to be $3.4 billion annually.

It is vital to remember that this plan is a LONG way from becoming reality and there is nothing to say it can’t be changed. First, both chambers have to approve putting a constitutional amendment on the ballot. That requires a 3/5ths vote in both chambers. Second, if that happens, the question will then appear on the ballot in November 2020. Third, the question will then have to receive 50% support of ALL the people casting ballots in the election (will never happen because not everyone votes the entire ballot) or 60% of those voting on the question. Fourth, if they meet that threshold, the Assembly will have to approve the rates. Now, the Assembly could put into law these rates with a provision that states ‘if and only if the constitutional amendment is approved’ but that still would not preclude them from coming back and changing the rates. Bottom line: there is at least 19 more months before anything can happen.

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PROPERTY TAX

Newly-elected Cook County Assessor Fritz Kaegi is advocating for a significant change in the property tax assessment process. SB 1379 (Sen. Toi Hutchinson, D-Chicago Heights)/HB 2217 (Rep. Will Davis, D-East Hazel Crest) passed out of the Senate Revenue Committee but only upon the promise that the proponents would be back with a substantive amendment addressing the concerns raised.

As proposed, the legislation would require non-owner occupied income producing properties to disclose their income and expenses annually to the Assessor’s office. In its current form, the proposal does not apply to residential properties with 6 or fewer units or with a market value under $1 million. It also does not apply to commercial properties with a market value under $400,000. The argument of the Assessor is this information would lead to a more accurate assessment process. A coalition of interested groups including IRMA, have and continue to meet with the Assessor’s Office. We share the goal of a more accurate and transparent assessment process but believe the proposal in its current form is highly flawed.  Just to name a few, examples of issues that must be hammered out in detail include definitions, privacy, scope of data, program evaluation, etc. This is a highly technical area where the smallest omission or error can have grave consequences. These difficult questions must be addressed in the legislation and not left to arbitrary ‘rules’. Keep in mind, Cook County does not have an administrative rules process like JCAR.

It is likely the House Revenue & Finance Committee will have a subject-matter hearing next week and discussions will continue behind the scenes.

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PLASTIC BAG TAX ADVANCES

SB 1240 (Sen. Terry Link, D-Gurnee) creates the Checkout Bag Tax Act and imposes a tax of $0.07 on paper and plastic bags used by a customer at a retail establishment in Illinois.  As currently drafted the proceeds of the tax are distributed in the following manner: (1) the retailer retains $0.02 per bag to cover their costs; (2) $0.02 per bag is distributed to the General Revenue Fund; and (3) $0.03 per bag is deposited into the Checkout Bag Tax Fund. The $.03 from in the Checkout Bag Tax Fund is then distributed to local governments to use for funding the collection of household hazardous waste such as needles, paint, batteries and other common items such as mattresses, plastic bags, auxiliary containers, etc. It also provides funds to local governments for education and grant programs to increase the recycling and composting in the Illinois.

Municipalities that do not already have a plastic bag ban or tax would be prohibited from banning, regulating or taxing plastic or paper bags or auxiliary containers.  Chicago, Oak Park, and Evanston would be able to keep their current ordinances but could not change them unless to make them consistent with the proposed state law. This is to avoid both a municipal tax and a state tax.

IRMA and coalition of stakeholder including the Illinois Manufacturers Association (IMA), Solid Waste Agency of Lake County (SWALCO) and Solid Waste Agency of Northern Cook County (SWANCC) worked together to support this initiative because it: (1) provides consistency for retailers, manufacturers, municipalities, and counties throughout the state in regards to plastic bags and auxiliary containers; (2) addresses environmental concerns of plastic and paper bag usage; (3) provides additional funding for a significant expansion of recycling and composting infrastructure; (4) provides a non-discriminatory tax on bags regardless of material or industry, and (5) provides a consistent revenue stream for the state.

The legislation passed out of the Senate Revenue Committee unanimously by a vote of 7-0. The Sponsor agreed to hold it on Second Reading to continue the dialog with the Governor’s office who has proposed a 5-cent tax on just plastic bags. An approach IRMA opposes.  IRMA would like to thank Senator Link for his continued leadership on this issue and for bringing a diverse coalition together to collaborate.

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E-CIGARETTES INCLUDED IN ILLINOIS SMOKE FREE ACT

SB 1864 (Sen. Terry Link, D-Gurnee) include e-cigarettes in the Smoke Free Illinois Act (Public Act 95-0017). The Smoke Free Illinois Act prohibits smoking in public places and places of employment and within 15 feet of any entrance, exit, windows that open, or ventilation intake of a public place or place of employment. Places of employment are defined any area under the control of a public or private employer that employees are required to enter, leave or pass through during the course of employment. These areas include, but are not limited to, offices and work areas, restrooms, conference rooms and classrooms, break rooms and cafeterias and other common areas. Smoking also is prohibited in public conveyances, like taxis, buses, shuttles and any vehicle owned, leased or operated by the state or a political subdivision of the state.

The legislation passed out of the Senate Public Health Committee unanimously by a vote of 12-0.
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