Tax Decoded | Fall 2017
Taxed in Haste
Assessing the unintended consequences of Illinois’ latest income tax law changes.
Keith Staats, JD
Executive Director, Illinois Chamber Tax Institute
Deciphering Today's State & Federal Tax Law
In the waning days of the Spring Session, the Illinois General Assembly passed surprising
legislation, permanently increasing the state’s individual income tax rate to five percent
and the corporate income tax rate to seven percent—that’s right; permanent.
Early versions of the legislation (SB-9) contained temporary tax rate increases. However,
one of the last amendments to the bill, a 500 page document, made the move permanent
in spite of opposition.
As someone who testified in opposition of the amendment, I tried to raise attention to the
unintended consequences of hastily making the income tax rate increases permanent.
The ancillary impact of a permanent income tax increase is something a CPA would recognize
immediately—it does more than simply increase the amount of taxes paid. In the
case of publicly traded companies, enacting a permanent income tax rate increase triggers
significant financial reporting issues.
As explained to me by a CPA member of the Illinois Chamber Tax Institute, companies are
required to record deferred tax liabilities for financial reporting purposes under U.S. GAAP.
Tax law changes, like this permanent income tax increase, mandate a recalculation of
deferred tax liabilities (future tax liabilities recorded on the company’s books).
When a state increases the statutory income tax rate, a company is required to restate existing
deferred tax liabilities at the higher rate on its financial statements. Such an increase
in deferred tax liability requires companies to recognize an expense to the income
statement in the quarter the rate change is enacted. The recognition of these
additional expenses will affect a company’s overall financial performance, which could
also affect its stock price.
Some states have amended their laws to lessen the impacts major income tax law changes
have on company financial statements. Consider Massachusetts’ corporate tax law
amendment that mandated combined reporting. All affected companies had to restate
deferred tax liabilities.
Massachusetts then enacted legislation to establish a deduction for corporate taxpayers
that experienced an increase in a combined group’s net deferred tax liability due to the
state’s income tax law change. This offsetting deduction aimed to reduce the potential
financial statement impact. The deduction wasn’t effective immediately, but it didn’t need
to be to provide financial statement relief.
Massachusetts’ provision originally intended to provide a tax deduction to the affected companies
over a seven-year period beginning in 2012, but implementation has been delayed due to fiscal constraints. Current Massachusetts
law provides for a deduction over
a 30-year period beginning in 2021.
Even though the deduction is not yet
available, the presence of the Massachusetts
deduction (despite periodic delays in
implementing it) has been a benefit to the
companies directly impacted by the
income tax law change. The continuation
of the deduction in some form has
allowed the affected companies to avoid
the financial statement impact they were
originally seeking to mitigate, while
delaying and minimizing the revenue
impact to the state of Massachusetts.
Washington, D.C. and Connecticut have
also enacted, but not implemented,
similar legislative relief.
As executive director of the Illinois Chamber
of Commerce Tax Institute, I’ve been
leading the charge to propose an amendment
to Section 203 of the Illinois Income
Tax Act. The amendment would establish
a subtraction modification (deduction),
similar to Massachusetts, offsetting the
adverse impact of Illinois’ permanent
income tax rate increase on the financial
statements of publicly traded companies.
The draft legislation proposes making the
deduction effective beginning with tax
years beginning on or after July 1, 2025
and is spread over a 10-year period. In
other words, there would be no revenue
impact to the state until tax years beginning
on or after July 1, 2025. The Illinois
General Assembly would have plenty of
opportunity to evaluate the deduction and,
if it so chooses, modify it by deferring
the date amortization of the deduction
begins or lengthening the time period the
deduction can be claimed.
In order to provide financial statement
relief to affected companies, this issue
must be addressed before publicly traded
companies are required to complete their
third quarter reporting for financial statement
purposes. Accordingly, legislative
relief must be enacted by Sept. 30, 2017.
By the time you read this column, we’ll
know whether our efforts have been
successful. But whatever the outcome, the
takeaway for policymakers is that there
are almost always unintended consequences
of legislation—and when legislation
is made in haste, there’s no time to
fully identify and react to those unintended