Tuesday, March 01, 2011

Federal tax break could put hole in Quinn's budget

By Jamey Dunn

Gov. Pat Quinn’s proposed budget counts on a move to decouple state tax code from a federal plan to spur businesses to spend more on equipment. Illinois could stand to lose more than $1 billion if it stays in step with the feds on the tax benefit for businesses, according to a study released today.

The federal provision is part of a compromise between President Barack Obama and Republican members of Congress to extend income tax cuts enacted by President George W. Bush. The provision allows businesses to deduct the entire costs of spending on items such as machinery and equipment from September 8, 2010, to December 31, 2011, all at once on their federal tax returns. Without the benefit, companies would have to spread those tax deductions over several years, a practice known as “depreciating.”

Under the compromise, businesses can then deduct half of the cost of spending for those items during calendar year 2012 and spread out the remaining cost over the usual “depreciation” schedule.

The federal provision is an extension and expansion of a plan approved in 2008 that was scheduled to sunset in 2010. Because Illinois' income tax code falls in line with federal code, businesses also would be able to take similar deductions on their state tax returns during the same time frame.

A study from the Washington-D.C.-based Center on Budget and Policy Priorities took a look at how much revenue states could miss out on due to the tax break at a time when many are facing deficits. The group estimates 19 states — including Illinois — that link their practices to federal tax provisions would lose a total of $5.3 billion under the extended plan. According to the center’s projections, Illinois could potentially lose the most, with an estimated hit of more than $1 billion. A spokesperson for Quinn’s budget office estimates the state would lose between $50 million to $100 million in fiscal year 2011 and $520 million to $615 in fiscal year 2012. Kraft said there would be a loss in fiscal year 2013 as well, but the office does not have estimates on it yet. She added that Quinn’s administration is drafting legislation to split the state from the federal practices on the issue.

Mark Denzler, vice president of government affairs for the Illinois Manufacturers Association, said the center’s revenue estimates are inflated. “It would be nowhere close to that.” He said the temporary change to the way businesses deduct capital spending was put in place after the terrorist attacks on September 11, 2001, to help spur the sluggish economy by encouraging businesses to expand their operations. Denzler said Obama extended the measure because he realizes how important it is in the current economic downturn, and states should recognize that, too. “We would just be continuing the current practice of what Illinois has been doing for almost a decade now,” Denzler said. He added that states would not lose money in the long run because companies would still be able to write off the purchases on their taxes without the change. However, the tax benefits to businesses, and the cost to the state, would be spread over several years if the state did not go along with the feds.

Nicholas Johnson, who co-authored the study for the center, said most federal lawmakers probably didn’t consider the impact on states when they extended the change. He added that they likely had “no expectations” that the states would do it, too.

On the day of the budget address, House Speaker Michael Madigan took issue with Quinn estimating revenue in his budget proposal based on the assumption that the legislature would pass a bill to end the accelerated tax bonus in Illinois. Madigan spokesman Steve Brown said Quinn’s move went against recently enacted proposals to reform the budgeting process in Illinois, including requiring budgets to be based on the revenue available at the time they are created. “On day one [of the budgeting process], we were not off to a good start,” Brown said.

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