January 23, 2015
The State of Illinois projected a major loss of income tax revenues in FY2015 due to the reduced rates for individuals and corporations that took effect on January 1, 2015. However, corporate income taxes have taken a steeper decline than originally projected and began to fall even before the rate declined to 5.25% from 7.0% halfway through the fiscal year.
The December 2014 monthly revenue report from the Commission on Government Forecasting and Accountability (COGFA) showed corporate income tax revenues declining by $89 million from December 2013. Receipts were also $217 million less for the first half of FY2015 compared to the first half of FY2014 (the State’s fiscal year runs from July 1 to June 30).
Due to the weak performance, projections of total corporate income tax revenues for FY2015 were reduced by $405 million to $2.7 billion from $3.1 billion in the Governor’s Three-Year Projection, which was published on January 1, 2015. It is unclear why corporate income tax receipts are so much lower than originally projected. As discussed here, many of the underlying economic indicators for Illinois have shown positive trends through the first quarter of FY2015.
Officials from the Illinois Department of Revenue (IDOR) are looking into whether another provision of the Illinois Income Tax Act that took effect on January 1, 2014 may be affecting the way businesses are estimating State tax liabilities. The law that temporarily increased the corporate income tax rate from 4.8% to 7.0% as of January 1, 2011, also eliminated the ability of businesses filing as C corporations to deduct net operating losses from their taxable State income. This was intended to maximize the amount the State received from the higher rates but was amended on December 12, 2011 to allow for up to $100,000 of losses to be deducted. So for C corporations filing taxes in calendar years 2010 and 2011 no net operating loss was allowed and in 2012 through 2014 only up to $100,000 was permitted.
It was estimated that the complete elimination of the net operating loss deduction would increase State tax revenues by $250 million annually and that the capped deduction would garner an additional $100 million annually for the years that it was in effect.
The changes to the net operating loss rules, explained in this bulletin from IDOR, allow for the business to carry forward annual losses from up to 12 years into the future. So the additional tax revenues received by the State between FY2011 and FY2015 attributable to the changes in net operating loss deductions served more as an advance of funds from future years. Now that the limitations on the deduction have expired, C corporations are expected to seek reductions in taxable income that they would have otherwise claimed during the years the net operating loss restrictions were in place. Estimates are not yet available on exactly how much State revenues will decline from this change.