By Karen Pierog
CHICAGO (Reuters) - With big Illinois state income tax increases set to partially expire in 2015, the Democratic head of the state's House of Representatives on Thursday introduced a bill to permanently reduce the corporate tax rate.
The cut proposed by House Speaker Michael Madigan would reduce revenue to the state treasury by $1.5 billion in the fiscal year beginning July 1. It would set the corporate income tax rate lower than it was before a temporary increase was imposed in 2011, when Illinois also imposed a steep hike in the personal income tax rate. The tax increases were aimed at paying down the state's huge backlog of unpaid bills.
Madigan's proposal comes as the state is facing a tough budget for the next fiscal year given the big hole the tax rate rollbacks will cause.
As for the personal income tax rate, which will drop to 3.75 percent from 5 percent in 2015, Steve Brown, Madigan's spokesman, said that would be addressed as the legislature debates the fiscal 2015 budget Governor Pat Quinn is scheduled to unveil next month.
Madigan's proposal would reduce the corporate tax rate to 3.5 percent, below where it stood prior to the corporate tax hike in 2011. The new tax would create a combined corporate tax rate of 6 percent, with the state's 2.5 percent personal property replacement tax taken into account.
Illinois' corporate income taxes already are set to move back next January, from the current rate of 7 percent to a new level of 5.25 percent on business profit. Prior to 2011, the rate was 4.8 percent.
Madigan's rate cut would be retroactive to January 1, 2014, and would reduce revenue for the first six months of the calendar year by as much as $700 million, according to a statement from the speaker.
Madigan in a statement pitched the new plan as a way to improve the state's business climate.
"I think you make up (the tax revenue loss) partly by making Illinois a more attractive place for employers to hire and expand and locate," Brown said.
He added that Madigan's plan emerged as part of an examination of the state's "hodge-podge" approach to doling out tax breaks to business.
Illinois in recent years has offered millions of dollars in tax breaks to keep CME Group Inc and Sears Holdings Corp in the state, but last year it turned down Archer Daniels Midland Co, a company that stayed in Illinois anyway.
Republican lawmakers, who opposed the 2011 tax hike, had been worried that Democrats who control the legislature would act to make permanent the higher rates.
"I'm glad there is now a recognition that their tax increase is driving jobs out of Illinois," said Senate Republican Leader Christine Radogno in a statement.
"On the surface we are thrilled that the majority party seems to finally be getting the message that something needs to be done, but remain cautious about how they intend to make up the lost revenue," House Republican Leader Jim Durkin said in a statement.
Corporate income tax collections, which totaled $3.17 billion in fiscal 2013, are expected to fall to $2.76 billion in fiscal 2016, the first full fiscal year affected by the tax rate roll-back, according to a three-year projection by the governor's budget office.
Personal income tax collections, which hit $16.5 billion in fiscal 2013, would drop to $12.4 billion in fiscal 2016. The 2011 tax hike increased the flat-rate personal income tax to 5 percent, a two-thirds increase over the previous level.
The projection also indicated that Illinois' budget deficit would rise from $1.9 billion in fiscal 2015 to $4.1 billion in fiscal 2016.
The fate of the tax rate hikes remains a concern for Wall Street credit rating agencies, which rate Illinois' general obligation bonds lower than those of any other state. Illinois was able to relieve some credit pressure by passing a comprehensive public pension reform law in December, but that law has been challenged by unions and other groups claiming it violates a state constitution protection against diminishing pensions of government workers.
(Editing by David Greising and Matthew Lewis)