June 17, 2011
Despite a significant increase in Illinois’ corporate income tax rate enacted in January 2011, much of the anticipated new State revenue will be offset by corporate tax incentives provided in recent changes to the federal tax code.
Known as bonus depreciation, the federal rule allows businesses to take an upfront deduction for the cost of capital investments in machinery or equipment from their annual taxable income. The amount of corporate income that is taxable on the state level in Illinois and 17 other states directly conforms to the federal tax code so those states will face reduced taxable corporate income associated with the change in this rule. The bonus depreciation benefit for corporations, also referred to as expensing, was included as part of a package of tax cuts added to a bill to extend unemployment payments for individuals whose benefits were set to expire at the end of 2010. The Federal Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 passed by the U.S. Congress in December 2010, among other tax cuts, allows companies to deduct 100% of the cost of equipment and machinery purchased and put into operation between September 8, 2010 and December 31, 2011 from their taxable income. In the 2012 calendar year, the law allows businesses to continue to reduce their taxable income but only by 50% of the cost of capital equipment purchases. Normally businesses must spread out depreciation of their capital investments incrementally over the entire useable life of the equipment. Bonus depreciation was previously enacted on the federal level in 2003 for 30% of the cost of capital equipment investments and in 2005 and subsequent years for 50% of the cost.
States that conform to the federal tax code to determine taxable corporate income on the state level have dealt with the tax change differently over the years. In 2003 Illinois decoupled from the 30% federal bonus depreciation and again decoupled from the 50% bonus depreciation in 2005. Illinois’ legislation decoupling from the 50% bonus depreciation does not apply to the 100% bonus depreciation because it specifically applies to corporations that take exactly a 50% bonus depreciation deduction. If not altered, the law would then apply to the federal rules for bonus depreciation in 2012.
After the corporate income tax rate in Illinois was increased from 4.8% to 7.0% in January 2011, the Governor’s Office estimated gross state revenues would increase by $180 million in FY2011 and $917 in FY2012.1 However, these estimates were based on the assumption that the General Assembly would take action to decouple from the 100% bonus depreciation provisions. Without taking action to decouple from the increased bonus depreciation, the Governor’s Office cautioned that the General Funds revenue would decline by between $50 million and $115 million in FY2011 and between $520 million and $615 million in FY2012.2
To date, the General Assembly has not taken action to decouple from the federal bonus deprecation as part of its FY2012 budget. As previously discussed here, the legislature enacted a budget based on much lower revenue estimates than the Governor’s recommended budget. Since the revenue projection that the enacted budget was based on, totaling $33.2 billion, reduced estimated corporate income tax receipts by $759 million, the legislature’s decision not to take up the Governor’s proposal to decouple from this federal tax change will not create a gap in the FY2012 budget as it currently stands. However, the State was forced to cut appropriations in the coming year to account for the loss of revenue for this corporate tax benefit.