 Senate Bill 1719, a “privilege tax” proposal from state Sen. Daniel Biss,
D-Evanston, has failed to pass the Illinois House of Representatives. The bill,
which would impose a 20 percent tax on fees earned by investment managers,
passed the Illinois Senate May 23 by a 32-24 margin, with one senator voting
“present.”
As the spring legislative session ended May 31, the bill would have to pass the
House by a three-fifths supermajority if that chamber takes it up before the
start of the next legislative session in January 2018. The House has set June 30
as the final action deadline for the bill.
SB 1719 is one of two “privilege tax” bills introduced in the General Assembly
during the spring session. The bill imposes a tax on partnerships and S
corporations engaged in investment management services at the rate of 20 percent
of the fees calculated by reference to the performance of the investment
portfolio funds. House Bill 3393, a “privilege tax” plan from state Rep. Emanuel
Chris Welch, D-Hillside, also would have hit investment management firms with a
20 percent tax on their fees, but HB 3393 was never called for a vote by the
full House.
The proposed 20 percent tax is intended to compensate for a federal provision
that taxes carried interest earned by investment firms at the capital gains
rate, rather than at the higher ordinary income rate.
An earlier version of SB 1719 would have made the effective date of the Illinois
tax contingent on New York, New Jersey and Connecticut all passing similar
versions of the tax. That version also would have eliminated the Illinois tax in
the event Congress passed and the president signed a law changing the U.S. tax
code to tax investment fees in this way.
But the version of the bill that passed the Illinois Senate would make Illinois
stand alone among states with large financial sectors in imposing this tax on
investment managers’ fees. Moreover, this bill would not eliminate the tax in
the event federal law changed, either.
Groups such as the Chicago Teachers Union have demonized those in the financial
sector for their “outsized fund earnings” and have supported plans to force
investment managers and “the rich” to pay their “fair share” of taxes.
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According to an Illinois Department of Revenue
fiscal note filed with regard to HB 3393, a 20 percent “privilege
tax” could bring in as much as $1.7 billion in tax revenue in the
first year of implementation. However, in their zeal to get
investment managers to pay up, privilege tax backers would drive
financial firms – many of which are highly mobile – out of the
state. Many firms in Illinois’ venture capital industry – which
provides financing for the tech sector among other job creators –
would head for the exits rather than pay the new tax, according to
Wirepoints Illinois News.
The poorly thought-out nature of the bill is further reflected in
the fact that it fails to account for apportionment. That means the
Prairie State might tax income that is already properly taxed by
other states, which could violate the U.S. Constitution. As the bill
imposes an additional tax on fees earned by investment managers, it
might also violate the Illinois Constitution’s income tax provision,
which states that “[a]t any one time there may be no more than one
such tax imposed by the State for State purposes on individuals and
one such tax so imposed on corporations.” The bill would almost
certainly face legal challenges if enacted.
Illinois’ unemployment rate hovers above national and regional
averages, and its out-migration rate surpasses that of every state
in the region. Record amounts of income-earning power have left the
state in the last five years. Yet lawmakers have proposed a slew of
new taxes and tax hikes, which would encourage even more employers
and residents to flee the state.
Rather than seeking to punish successful firms and business people,
Illinois policymakers should focus on structural changes to increase
the state’s competitiveness and make it hospitable to job creators.
Instead of calling for “soak the rich” taxes that would be
self-defeating by driving economic activity and taxpayers out of the
state, lawmakers should address Illinois’ out-of-control pension and
retiree health care liabilities and government worker costs that
drive incessant demands for more revenue.
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