September 26, 2014
As recently as 2011, the State of Illinois projected its backlog of unpaid income tax refunds could increase to more than $1.0 billion but by the end of FY2014 nearly all refunds were paid. In FY2015, for the second year in a row, the State transferred revenues originally diverted to pay for refunds back into the operating budget.
In FY2014 the State ended the year with only $1.6 million in approved refunds yet to be paid compared to a peak of $735 million in FY2010. The State also received a transfer into the FY2015 General Funds operating budget totaling $63.2 million from a surplus of income tax receipts diverted for refunds in FY2014. Similarly, the State transferred a surplus of diverted income tax revenues totaling $397 million into the FY2014 General Funds budget that were set aside for refunds in FY2013. However, the backlog of unpaid income tax refunds was much higher, totaling $45 million at the end of FY2013.
The General Funds revenue estimates included in the State’s annual budgets are based on corporate and individual income tax revenue net of amounts diverted to the Income Tax Refund Fund to pay for anticipated refunds. Each year diversion rates, known as Refund Fund rates, are determined in order to repay expected overpayment of taxes by individuals and businesses. The higher the Refund Fund rates are set, the less revenue is available to support the State’s regular General Funds expenditures.
Under the Illinois Income Tax Act, any surplus in the Income Tax Refund Fund is required to be transferred to the General Funds at the beginning of the next fiscal year. If approved refunds remain unpaid at the end of the year, diversions from the next year’s income tax receipts are then used to pay any backlog of unpaid refunds.
Refund Fund rates in the chart were set by Illinois General Assembly as part of the annual budget process. If the rates are not set legislatively prior to each year they are then determined by statutory formula. The formula calls for total refunds paid to be added to the refunds approved but unpaid at the end of the year and divides that sum by the gross receipts. The last time the rates were set using the formula was FY1998.
In FY2014 the legislature set the individual income tax Refund Fund rate at 9.5% and in FY2015 the rate was increased to 10.0%.
Corporate income taxes were diverted for refunds at a rate of 13.4% in FY2014, which is increased to 14.0% in FY2015.
The rates were previously lowered in FY2014 in response to the
surplus of $397 million that existed at the end of FY2013. In FY2013
the rates were 9.75% for individual income taxes and 14.0% for corporate income taxes.
Despite the surplus in FY2014, the FY2015 rates are increased due to the partial rollback of the income tax increase that takes place halfway through the fiscal year. On January 1, 2015 the individual income tax rate is reduced to 3.75% from 5.0% and the corporate income tax rate declines to 5.25% from 7.0%.
The midyear decline in gross income tax receipts that is expected in FY2015 due to the lower rates will lead to demand for some larger refunds based on the higher tax rate at the beginning of the year. Some of the refunds from the beginning of the year will be paid through diverted funds from a lower amount collected in the second half of the year. By diverting revenues at the higher refund rates in FY2015, which was also proposed in the Governor’s recommended FY2015 budget, the State aims to avoid increasing the backlog of unpaid refunds at the end of the fiscal year.