Why is Illinois’ Corporate Income Tax Revenue Down?
Lower-than-expected revenues are exacerbating the state’s budget crisis
The April 2017 monthly briefing from the Commission on Government Forecasting and Accountability (COGFA) showed another month of significant year-over-year declines in revenue from corporate income tax are down in Illinois in the current fiscal year, compared to FY2016.
Over the first ten months of the fiscal year, corporate income tax revenue is down $837 million, or 40.8 percent, compared to FY2016. And with only May and June left in FY2017, it’s highly unlikely that corporate income revenue can rebound to match FY2016 levels.
Comparatively, personal income tax revenue is up by just over $100 million (0.8 percent) compared to FY2016, while sales tax revenue is down $37 million (0.6 percent). In other words, the corporate income tax is the outlier, and is by far the largest reason that the state has seen nearly $1.1 billion (4.3 percent) less in FY2017 revenue than in FY2016.
This unexpectedly weak showing means a bigger end of year deficit. In July 2016, COGFA projected FY2017 revenue to be $30.88 billion; but in their March 2017 revision, that projection fell to $30.21 billion. CTBA analysis projects that this will increase the state’s deficit at the end of FY2017 to about $16.5 billion.
But why? Personal and sale tax revenue are roughly the same as a year ago. Why is corporate income tax revenue down by over $800 million?
In August, COGFA provided a warning that corporate income taxes may have some unusual month-to-month variability due to a ledger conversion (a software upgrade) at the Illinois Department of Revenue (IDOR): “It should be mentioned that since the IDOR’s recent ledger conversion, some historic receipt patterns have changed. In particular, corporate income tax has behaved erratically. It is unknown at this time if this is temporary or will persist into future months.” The hope was that the variance in revenues, month-to-month, would decrease, but they have not. Ten months into the fiscal year, it seems clear the state is looking at a full-on decline, not just increased monthly variability.
Another theory is that IDOR has changed how some pass-through withholdings are categorized, switching them from corporate to personal income taxes. However, if that was the case, one would expect a larger increase in personal income tax revenue than $102 million year-to-year, especially when revenue from the corporate income tax is down by over $800 million.
We at CTBA have been tracking this for the last six months, hoping each month that this would be the month were corporate income taxes start to catch up to FY2016 levels. But with only two months remaining in FY2017, time is running out and the deficit appears to be getting larger.