By DIANE ROSS   Legislative Action

Taxes on the agenda

THE YEAR of sales tax relief was 1979. Enter the recession: The volume of trade went down, and projected sales tax revenues went out the window. The year of rolling back the relief was 1981. Enter Reaganomics: There were cuts in federal income taxes and — with the state income tax directly tied to the federal — nagging worry over the effect on the state's already eroded tax base. The year of facing reality will be 1983. The No. 1 issue before the General Assembly will be how to reform Illinois' tax structure.

But 1982 is the year of the elections, and neither the Democrats nor the Republicans were in any position this session to reform taxes, especially if it involved raising them. Although lawmakers considered more than 50 major bills, they passed measures in only three areas: corporate taxes, the inheritance tax and the public utilities tax. All provided tax relief.

It was no surprise legislators didn't raise the gas tax or the liquor tax or the insurance tax. When it came to corporate taxes, it was no surprise they passed three emergency measures giving business what it wanted. The General Assembly: 1) banned the recent use of the unitary or combined apportionment method of taxing corporate income; 2) froze the classification of corporate property; 3) refused to disconnect Illinois from the new federal corporate depreciation schedule. Manufacturers didn't waste any time arguing that the tax incentives would create jobs; they got right down to the threats: Disincentives would destroy jobs.

Legislators also repealed part of the inheritance tax, and they outlawed (at least in part) the practice of double taxation on public utilities, two relatively recent tax reform proposals. That's somewhat surprising in this time of revenue shortfalls, even when you know both parties were looking for some tax relief to campaign on.

Inheritance tax

The partial repeal of the state inheritance tax would eliminate the tax effective July 1, I982, except for an amount equal to the credit the federal inheritance tax allows. Since the federal credit is now about one-third of the state tax, that means about two-thirds of the state tax would be repealed. When fully implemented, the partial repeal will cost the state an estimated $80 million a year in revenue, local government about $3.2 million.

Proponents see the partial repeal as the most significant action yet in the fight to save the family farm and family business from economic extinction, saying cash-poor inheritors must often liquidate their estates to pay high taxes.

During the last decade, the rank of the inheritance tax as a state source of revenue has remained about the same: sixth, after the income, sales, public utilities and cigarette taxes and interest earned on state investments. The yield from the tax, however, has nearly tripled, jumping from $50 million in state fiscal year (SPY) 1971 to $146 million in SPY 1981, the last year for which actual receipts are known. Local government gets 4 percent of the revenue.

Illinois has enacted only two significant changes in the inheritance tax under the Thompson administration, both designed to benefit the family farm and family business. In 1980, legislation allowed inheritors to defer payment of taxes for five years and then to make 10 equal installment payments at 6 percent interest, effective January 1, 1981. In 1981 legislation increased the basic exemption, for surviving spouses, from $40,000 to $60,000, effective September 25, 1981.

The partial repeal bill, H.B. 93, sponsored by Rep. Donald Deuster (R., Mundelein), passed the Senate last year, but didn't pass the House until this year. Initially, Deuster's bill did not repeal the tax; H.B. 93 was rewritten in the Senate (Senate Amendment 3). The Senate passed the repeal version 34-12 June 25, 1981, but the House failed to concur, and the bill was tabled, July 1, 1981. The House finally concurred 132-24 June 29, 1982.

Public utility taxes

Illinois would outlaw at least part of the practice of double public utility taxation under the compromise tax relief bill sent to the governor. The bill redefines gross receipts, taking municipal taxes out of the base on which the state taxes utilities. The new definition, however, leaves state taxes in the base on which municipalities tax utilities; it was a compromise designed to save local government from losing revenue.

The tax relief would amount to about only .05 percent of a customer's monthly utility bill (water, electricity, natural gas, telephone and telegraph), but the cost to the state in lost revenue is estimated at $12 million a year. If state taxes had been removed from the municipal base, local government would have lost about $13 million a year.

Over the last 10 years, the yield from the state public utility taxes has increased about 300 percent. The fifth largest state source of revenue in SPY 1971, public utility taxes yielded $154 million; the third largest source in SPY 1981, they yielded $530 million.

At issue is the statutory definition of utilities' gross receipts. The definition allows the state to include the municipal tax, and an additional municipal accounting fee, in the base on which it taxes utilities — and the definition allows the municipalities to include the state tax in the base on which they tax utilities. (The Illinois Commerce Commission (IlCC) used to include both state and municipal taxes in the base on which it taxes privately owned utilities to defray commission expenses, but the IlCC

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now includes only a portion of the state tax.) The current definition of gross receipts, then, literally allows a tax on a tax.

The practice of double taxation was successfully challenged, however, in October 1979 when Charles Getto, a Chicago attorney, won a class action suit against Illinois Bell Telephone and the City of Chicago before the Illinois Supreme Court (See Illinois Issues, "Judicial Rulings," December 1979, p. 27). The high court's decision set a precedent which has enabled consumers to file similar suits against every public utility in the state.

The initial version of the bill redefining utilities' gross receipts was H.B. 2377, sponsored by Rep. Steve Miller (R., Danville), and promoted by the Taxpayers' Federation of Illinois. H.B. 2377 would have eliminated double taxation by taking municipal taxes out of the state base — and taking state taxes out of the municipal base. The bill passed the House 125-30 May 18, but it was held in the Senate Rules Committee. A conference committee later rewrote H.B. 991, a vehicle, as a compromise version, designed to save local government from losing revenue and delay the loss to the state until January 1, 1984. The House adopted the conference committee report 166-1 July 1, the Senate, 57-0 July 2.

Unitary method of computing tax liability

Illinois would stop taxing multistate conglomerates on the income from their out-of-state subsidiaries under a bill that bans the unitary or combined apportionment method of computing tax liability. This measure, if signed by the governor, could cost the state as much as $180 million a year in lost revenue and local government as much as $100 million, but it is impossible to accurately project the loss.

Illinois stopped taxing out-of-state income under the 1970 Constitution. Caterpillar Tractor of Peoria, the state's largest single employer, objected, arguing that it overpaid when tax liability was computed solely on in-state income. Caterpillar won its refund case in the Illinois Supreme Court in February 1981 (see "Judicial Rulings," May 1981, p. 34).

The high court's ruling that the Constitution did not ban Illinois from taxing out-of-state income may have helped Caterpillar, but it hurt the rest of the multistate conglomerates. Chicago Bridge and Iron carried their appeal, which is still pending, to the U.S. Supreme Court in April 1982.

H.B. 2588, sponsored by Rep. E. J. Gior-gi (D., Rockford), would statutorily ban Illinois from using the unitary method effective January 1, 1983. Under the unitary method, subsidiaries are considered part of the conglomerate, and tax liability is computed as a percent of income attributable to business done in Illinois. Under separate apportionment, out-of-state subsidiaries are not considered, and tax liability is computed solely on in-state income. The bill passed the House 108-46 May 21 and the Senate 46-12 June 24.

Corporate personal property

The General Assembly, as required by the 1970 Constitution, repealed the corporate personal property tax and replaced it with a surtax on the corporate income tax in 1979. In a case involving Central Illinois Light Company, the state Supreme Court ruled in March 1981 that old property that was classified as personal before the tax was replaced cannot be reclassified as real (see "Judicial Rulings," May 1981, p. 34). The definition of new property, however, remains at issue.

The question is whether new property that would have been classified as personal under the old tax can be classified as real under the new tax. Personal property, of course, is no longer subject to state taxes; real property remains subject to local taxes. Business argues that classification of new property as real amounts to double taxation; local government argues that classsification as personal amounts to a tax break it cannot afford.

H.B. 1296, sponsored by Rep. Thomas Ewing (R., Pontiac), is a compromise measure that temporarily maintains the status quo. The bill, retroactively effective January 1, 1982, would freeze the classification of corporate property as it was before the tax was replaced in 1979. H.B. 1296 passed the House 158-9 April 21 and the Senate 53-5 June 23. A related bill, H.B. 2485 (actually Senate Amendment 4, sponsored by Sen. Jerome Joyce, a Democrat from Bradley), adds a sunset provision that unfreezes classification effective January 1, 1985. H.B. 2485 passed the Senate 57-0 June 25; the House concurred 148-2 June 2.7.

Federal tax depreciation schedule

Democrats tried but failed to "disconnect" Illinois from the new federal depreciation schedule in what was clearly the most partisan business tax issue before the legislature this session. No one knows how much failure to disconnect could cost the state in lost revenue; the estimates range from $25 to $100 million.

Under the U.S. Economic Recovery Act of 1981, the Accelerated Cost Recovery System takes effect unless states disconnect. This new federal depreciation schedule allows business to recover nearly all its invested capital. ( The old federal depreciation schedule allowed recovery of about two-thirds of invested capital.)

S.B. 1319, sponsored by Sen. Dawn Clark Netsch (D., Chicago), would have disconnected, but would have increased the state depreciation allowance by an amount equal to 40 percent of the federal depreciation allowance to offset part of the lost the business tax break. S.B. 1319 reached the floor of the Senate but was sent back to committee after a test vote failed. S.B. 1320, a companion bill, died in committee without a hearing.

Liquor, insurance and gas taxes

Now to the major tax bills that didn't pass, starting with the two "modest" proposals Gov. James R. Thompson made in his March Budget Message to the General Assembly. Although the governor waited until after the primaries to push for passage, his patience failed to win him enough votes.

First, the governor wanted to raise state liquor taxes to offset cuts he made in the budget for elementary and secondary education. He proposed the state switch from taxing volume to taxing alcoholic content, which would have yielded about $50 million a year. Such a bill was never introduced,

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however. Late in the session, Senate Minority Leader James Philip (R., Elmhurst) tried a committee but failed to amend the liquor tax hike onto H.B. 1373, a vehicle.

Second, the governor wanted to create a new tax on in-state insurance companies to generate revenue for mental health, an area in which he closed three institutions to cut costs. S.B. 1622, sponsored by Sen. Aldo DeAngelis (R., Chicago Heights), would have taxed in-state companies at 2 percent of their gross receipts, yielding about $100 million a year. (Out-of-state companies already pay such a tax for doing business in Illinois.) S.B. 1622 died in the Senate Revenue Committee without a hearing.

And in March the governor was also talking about the need to raise the state gas tax to generate revenue for both downstate highways and Chicago mass transit.

H.B. 2002, sponsored by Rep. Michael McClain (D., Quincy), would have hiked the state motor fuel tax by a total of 4.5 cents per gallon over two years, with the tax jumping from 7.5 cents to 11 cents July 1, 1982, and stepping from 11 to 12 cents July 1,1983. The hike would have yielded about 5200 million a year for downstate highways. H.B. 2002, however, failed miserably, 45-89, May 21 in the House. Thompson apparently did not support it; he obviously had not pushed Republicans to pass it.

McClain had headed a coalition of down-state Democrats and Republicans, backed by the Illinois Transportation Improvement Council, which represents labor, business and local government lobbies, ordinarily an unbeatable combination. Thompson, however, knew the Chicago Democrats would kill such a tax hike bill unless it bailed out the sinking Regional Transportation Authority (RTA). The coalition would lose support if it added such a bail out. But with the RTA afloat again (see "Legislative Action," August 1982, p. 36), the coalition may be able to pass a gas tax hike for down-state highways during the fall veto session.

Post-election session

The General Assembly is scheduled to meet again November 5, three days after the general election, to consider action on the governor's vetoes. Meanwhile the governor has until September 21 to act on all House bills and until September 13 on the Senate bills.

Further summary of significant bills from the spring session will appear in October's "Legislative Action," including pensions, insurance, education and others. For a brief summary of the governor's appropriations vetoes and his plan to furlough state workers, see "Executive Report" on page 38.

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