(Editor's note: This article was published first at Illinois Policy Institute).
Gov. J.B. Pritzker says one of his top priorities for the “lame duck” legislative session will be to increase taxes on Illinois small businesses. The governor wants to eliminate state-level tax benefits created as a form of economic relief when Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
“There are a number of things that I think should be taken up in the lame duck session – which again is relatively brief – but one of them, which not many people have talked about, is a decoupling issue,” Pritzker said during a Jan. 6 press conference. “There’s a tax provision, as a result of the CARES Act passage, that would essentially deprive Illinois of revenues that it otherwise should get.”
Illinois automatically mirrors certain federal tax changes in the state income tax code unless lawmakers pass a bill to prevent it. The governor called his proposal a “technical fix” and claimed it would be good for everyone in the state. In reality, the legislative change he is proposing would increase the tax liability for small businesses when many can least afford it and impede economic recovery from the COVID-19 crisis.
Illinois lost 20,000 jobs from October to November, while the nation overall has experienced seven straight months of job growth. The state’s 6.9% unemployment rate remains above the national average. Many businesses are still operating with restrictions imposed by the state to limit the spread of COVID-19, such as an indoor dining ban and the same for bars.
A December survey by the National Restaurant Association found that across the nation the average full-service restaurant had lost 36% of its sales revenue. It found 17% of restaurants have already closed permanently or long-term as a result of COVID-19 and measures taken to limit its spread.
Congress passed various forms of stimulus spending and tax relief in the CARES Act to help businesses and individuals deal with these economic challenges. One of those changes was to offer additional tax benefits for businesses that experience losses.
The CARES Act allowed businesses to carry back “net operating loss” deductions up to five years for losses that occur between Dec. 31, 2017, and Jan. 1, 2021. In other words, businesses could receive tax credits today for income tax returns in previous years in which the business was profitable.
The CARES Act also eliminated a cap that previously limited loss deductions to 80% of taxable income, allowing business owners to offset their full tax liability in a given year. Both changes gave businesses additional access to cash to help them survive the pandemic-related downturn.
A press release from the governor’s office on Jan. 8 inaccurately referred to these tax provisions as “corporate tax loopholes” and estimated eliminating them would raise $500 million towards closing the state’s budget deficits. Illinois already does not conform to the CARES Act provisions on business losses for corporations. Pritzker is proposing limiting the deductions for pass-through entities such as S corporations and partnerships, which tend to be small businesses. The governor also wants $20 million from eliminating smaller business tax credit expansions that were passed in 2019.
The Tax Foundation has recommended states maintain full conformity with federal tax treatment of net operating losses. The business loss deduction benefits in the CARES Act provide struggling companies with new tools to stay afloat during tough economic times, helping minimize job losses and business closures.
Rather than increasing taxes on struggling businesses, lawmakers should commit to pension reform and structural changes that can balance Illinois’ budget while respecting taxpayers and promoting healthy economic growth.
A constitutional amendment to allow pension reform that preserves workers’ earned benefits and allows for changes in unaccrued benefits, such as 3% compounding automatic annual benefit increases, would make the system more sustainable and make pensions more secure. A “hold harmless” pension reform plan developed by the Illinois Policy Institute would save the state roughly $2.4 billion the first year and more than $50 billion through 2045, while fully eliminating the debt over that time.
Taking away $500 million intended to help small businesses stay afloat during COVID-19 would inflict more damage on the group that has provided nearly 60% of Illinois’ net new jobs in recent years, and it won’t fix Illinois’ spending problem.