Pritzker again after up to $1B tax hike on 440,000 Illinois small businesses
Federal tax relief was championed so small businesses could better deal with COVID-19 economic impacts. Gov. J.B. Pritzker wants to undo that relief to keep $1 billion in state taxes from Illinois small businesses.
2020 was one of the worst years on record for the state’s economy, and Illinois’ 440,000 small businesses felt this pain more than most. Luckily, up to $1 billion in state tax relief is on its way thanks to Illinois automatically adopting a federal tax break intended to help struggling businesses.
But Illinois Gov. J.B. Pritzker tried once to cancel that relief, and now he’s trying again.
Leading up to and during his State of the State and budget address on Feb. 17, Pritzker pushed to close what he dubbed “corporate loopholes” in the state’s tax code. One was a provision in the Coronavirus Aid, Relief and Economic Security Act, which Illinois tax code would typically adopt automatically, that would essentially allow struggling small businesses that lost money in 2020 to get an advance on their future tax returns.
Pritzker was encouraging state lawmakers to eliminate this provision for S corporations, limited liability corporations and partnerships, the most common tax filing statuses for small businesses. His move would effectively strip these businesses of tax refunds they would be owed by the state of Illinois. The provisions were already eliminated for C corporations, the most common designation for large businesses.
It has been reported that 440,000 small businesses would be impacted by this change. These businesses are set to receive an estimated $500 million to $1 billion in tax refunds from the state.
That money could go a long way to providing cash flow for businesses that are in danger of closing permanently. However, state lawmakers may again consider taking away this relief from struggling small businesses, which are Illinois’ most prolific job creators.
Traditionally, if a business lost money, it could ensure it didn’t overpay in taxes by adjusting for the losses on either its past or future income. However, the Tax Cuts and Jobs Act limited these procedures to only allow businesses to perform a “carryforward” of those losses, letting them deduct losses from future income.
Because of the economic shock of COVID-19 and state-mandated lockdowns, many businesses found themselves facing massive losses in 2020 and without the cash flow needed to pay their staff, rent or other bills. Because of these struggles, the federal CARES Act let businesses apply 100% of their lost income to past years, rather than only future years. This process is known as a “carryback” of net operating losses for businesses.
A carryback would allow a business to deduct its losses during down years from its income in previous years, giving it a refund for excess taxes already paid based on its loss of income. This more immediate adjustment allows for additional cash on hand to pay bills and might even prevent some businesses from going under. That’s because businesses would have access to their money today, rather than waiting a full year for their tax bills to be adjusted.
Take the following example:
In both scenarios, the total amount paid in taxes remains the same. The only difference is when losses are accounted for.
Under a “carryforward” system, adjustments are made to tax bills in the year after losses occur, allowing businesses to pay lower future taxes. Under a “carryback” system, businesses get a tax refund in the years when they are not profitable, and resume paying taxes at their normal rates in years when they are profitable.
Luckily for struggling businesses, during “lame duck” session the 101st Illinois General Assembly rejectedPritzker’s call to decouple state tax policy from the CARES Act.
However, during his annual State of the State and budget address on Feb. 17, Pritzker proposed a variety of other tax hikes, which he once again called “cutting corporate loopholes.” He claimed he had support from state lawmakers.
While eliminating carryback provisions for S-corps was not among the nine tax policies that would take nearly $1 billion from the Illinois economy, Pritzker previously said he was “anticipating that it will get brought up soon in the new session of the General Assembly.” Right now insiders believe this tax hike proposal will be delivered through Senate Bill 217.
The carryback provision for S-corps within the CARES Act allows for struggling small businesses to get their tax refunds when they need it most, providing increased cash flow and potentially keeping their businesses afloat. However, Pritzker wants to prevent this accelerated relief, even though the policy doesn’t change the total revenues the state collects in the long run. It just makes it more difficult for Pritzker to balance his budget in the coming year.
Rather than denying struggling businesses much-needed relief, lawmakers should commit to pension reformand 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 converting the 3% compounding automatic annual benefit increases into adjustments tied to inflation – 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 during that time.
Taking away $500 million to $1 billion 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. The move would hurt them, and it won’t fix Illinois’ spending problem.