Bill to impose ‘privilege tax’ on investment managers fails to move in Illinois House

Bill to impose ‘privilege tax’ on investment managers fails to move in Illinois House

Senate Bill 1719 would impose a 20 percent surcharge on fees earned by investment managers, but the spring legislative session ended with the Illinois House failing to call the measure for a vote.

Senate Bill 1719, a “privilege tax” proposal from state Sen. Daniel Biss, D-Evanston, has failed to pass the Illinois House of Representatives. The bill, which would impose a 20 percent tax on fees earned by investment managers, passed the Illinois Senate May 23 by a 32-24 margin, with one senator voting “present.”

As the spring legislative session ended May 31, the bill would have to pass the House by a three-fifths supermajority if that chamber takes it up before the start of the next legislative session in January 2018. The House has set June 30 as the final action deadline for the bill.

SB 1719 is one of two “privilege tax” bills introduced in the General Assembly during the spring session. The bill imposes a tax on partnerships and S corporations engaged in investment management services at the rate of 20 percent of the fees calculated by reference to the performance of the investment portfolio funds. House Bill 3393, a “privilege tax” plan from state Rep. Emanuel Chris Welch, D-Hillside, also would have hit investment management firms with a 20 percent tax on their fees, but HB 3393 was never called for a vote by the full House.

The proposed 20 percent tax is intended to compensate for a federal provision that taxes carried interest earned by investment firms at the capital gains rate, rather than at the higher ordinary income rate.

An earlier version of SB 1719 would have made the effective date of the Illinois tax contingent on New York, New Jersey and Connecticut all passing similar versions of the tax. That version also would have eliminated the Illinois tax in the event Congress passed and the president signed a law changing the U.S. tax code to tax investment fees in this way.

But the version of the bill that passed the Illinois Senate would make Illinois stand alone among states with large financial sectors in imposing this tax on investment managers’ fees. Moreover, this bill would not eliminate the tax in the event federal law changed, either.

Groups such as the Chicago Teachers Union have demonized those in the financial sector for their “outsized fund earnings” and have supported plans to force investment managers and “the rich” to pay their “fair share” of taxes.

According to an Illinois Department of Revenue fiscal note filed with regard to HB 3393, a 20 percent “privilege tax” could bring in as much as $1.7 billion in tax revenue in the first year of implementation. However, in their zeal to get investment managers to pay up, privilege tax backers would drive financial firms – many of which are highly mobile – out of the state. Many firms in Illinois’ venture capital industry – which provides financing for the tech sector among other job creators – would head for the exits rather than pay the new tax, according to Wirepoints Illinois News.

The poorly thought-out nature of the bill is further reflected in the fact that it fails to account for apportionment. That means the Prairie State might tax income that is already properly taxed by other states, which could violate the U.S. Constitution. As the bill imposes an additional tax on fees earned by investment managers, it might also violate the Illinois Constitution’s income tax provision, which states that “[a]t any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations.” The bill would almost certainly face legal challenges if enacted.

Illinois’ unemployment rate hovers above national and regional averages, and its out-migration rate surpasses that of every state in the region. Record amounts of income-earning power have left the state in the last five years. Yet lawmakers have proposed a slew of new taxes and tax hikes, which would encourage even more employers and residents to flee the state.

Rather than seeking to punish successful firms and business people, Illinois policymakers should focus on structural changes to increase the state’s competitiveness and make it hospitable to job creators. Instead of calling for “soak the rich” taxes that would be self-defeating by driving economic activity and taxpayers out of the state, lawmakers should address Illinois’ out-of-control pension and retiree health care liabilities and government worker costs that drive incessant demands for more revenue.

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