However, "pass through" does not mean "small business." More than 50 percent of all pass-through income in Illinois and across the country is reported by taxpayers in the top 1 percent of the income distribution. The only people who will benefit from this change are those earning more than $250,000 (or $500,000 filing jointly) from other sources per year. The CARES Act total-income deduction could effectively allow high-income taxpayers to pay $0 in income tax for 2018 through 2020. If Congress’s goal was to help middle-income families or mom-and-pop shops, indirectly returning money to high-income pass-through entities based on business losses from previous years will not accomplish this goal.
Illinois’ automatic adoption of this total-income deduction means that businesses could avoid income taxes not only on the federal level, but also on the state level. Based on our estimates, this change will cost Illinois between $800 million and $1 billion in state income tax revenue over those three taxable years.
The Illinois General Assembly must stop the drain, and it can do so during the legislative session this January by amending its tax code to remove the total-income deduction.
Some taxpayers have already filed their taxes for 2019 and taken advantage of the total-income deduction for 2018 and 2019, costing Illinois millions of dollars. But the biggest business losses are likely to occur in 2020 due to the swift and severe economic downturn following the onset of COVID-19. Since the total-income deduction allows affected taxpayers to offset up to 100 percent of their income, higher losses will allow these taxpayers to offset more taxable income and, therefore, keep that $1 billion out of the Illinois tax code’s reach.
The CARES Act is a federal bill aimed at decreasing federal tax burdens. Amending the Illinois tax code to remove the total-income deduction will still allow Illinois businesses to benefit from the CARES Act, because the real relief will come from the substantial federal refund based on the top federal tax rate of 37 percent, not the low state tax rates of states in automatic conformity with the IRC who were inadvertently dragged into the CARES Act changes.
While $1 billion dollars won’t save the Illinois economy, former Senator Everett Dirksen had it right: "A billion here, a billion there, and pretty soon you’re talking real money."
Rebecca Roman and Sasha Timakova are rising third-year law students at the University of Chicago Law School.
via Crain’s Chicago Business
July 10, 2020 at 02:03PM