* The Bond Buyer has a story about JB Pritzker bill signings. Included is SB 1911, which has various revenue components. But sometimes, some of the publication’s reporting flies over my head. That’s to be expected in a publication aimed at tax and finance wizards, and it’s why people sign up for subscriptions. But this passage was puzzling to me…

The bill also makes a workaround to federal state and local tax deduction caps permanent and swaps the Global Intangible Low Tax Income tax for the Net Controlled Foreign Corporation Tested Income regime, effective Jan. 1. […]

The change from GILTI to NCFCTI drew opposition from the Taxpayers’ Federation. The goal of the change was to bring tax income back to the U.S. government, [Maurice Scholten, president of the Taxpayers’ Federation of Illinois] said, but NCFCTI lacks the 10% return on tangible capital in foreign jurisdictions that GILTI offered.

“This new regime is broader than GILTI; it’s not just a rebranding or renaming, there are substantive changes within it,” Scholten said.

They have other concerns, including about the apportionment factor that’s used to figure out how much income is subject to taxation in Illinois.

* So, I reached out to Scholten for a translation into English…

Under the U.S. Constitution, states may tax only income that is connected to economic activity in the state. Because large companies operate in many places at once, states use formulas to divide, or “apportion,” a company’s income among the jurisdictions where it does business. Apportionment is necessary because if each state taxed all of a corporation’s income, the company would be taxed multiple times on the same dollars and would likely owe more in taxes than it actually earned.

Illinois uses a very simple formula. It looks only at sales made by the company. If 5 percent of a company’s U.S. sales are to Illinois customers, Illinois taxes 5 percent of the company’s U.S. income. Under this system, the tax calculation generally includes only U.S. companies. Foreign subsidiaries are typically excluded, so income generated by the foreign subsidiaries and sales made by the foreign subsidiaries are not part of the apportionment formula or the tax base.

Illinois now includes 50% of GILTI for tax year 2025 and 50% of NCTI for 2026 and beyond. This is income earned by foreign subsidiaries through foreign activities and subject to foreign income taxes. Even though this foreign income is now included in Illinois’ tax base, the apportionment formula itself is unchanged; Illinois would still tax 5 percent of this larger tax base. If the formula reflected all of the income being taxed, it would compare Illinois sales to total sales everywhere that generated that income which is in the tax base.

From the example above, Illinois accounts for 5 percent of a company’s U.S. sales, Illinois would tax 5 percent of the company’s U.S. income. But once foreign income is added to the tax base, Illinois sales may represent only 2 percent of the company’s global sales. In that case, Illinois would reasonably tax only 2 percent of the company’s total income. The percentage shrinks, but the income base grows.

That mismatch matters. The Constitution requires state tax formulas to reflect a reasonable connection between the income being taxed and the activity occurring in the state. When income is included in the tax base but excluded from the apportionment factors, that connection breaks down. A formula cannot fairly apportion income it does not measure.

OK, I think I get it now.

* Back to the Bond Buyer…

The federation also opposed the decoupling from federal bonus depreciation. The measure concerns manufacturing facilities and when corporations can deduct the expenses for those facilities.

A federal law change in the Trump administration’s tax and spending bill allowed corporations to deduct those expenses immediately, giving them an immediate tax break while lowering tax revenue. When Illinois decoupled from that, it meant that companies have to deduct those costs over the life of the facility.

The revenue is eventually the same, but the state’s decoupling law means that Illinois won’t take a hit all at once. But that also means the state has lost a recruiting/retention tool, especially with manufacturers.

* The governor was asked this week about whether the decoupling legislation “makes the state less competitive.” His response…

I think first of all, the federal government has caused a massive issue for all 50 states. That is to say, every state has lost support from the federal government because of the OBBBA, I think I got all the letters in there. But, I mean, it’s billions and billions of dollars that are being lost by states from the federal government. And then they have the audacity to also go after state revenues and state money, for example SNAP. Trying to get hundreds of millions of dollars from states when that was not something, that was part of the SNAP program before. And so the decoupling is an effort to try to hold back the onslaught from the federal government, to make sure that we can support programs like the one we’re announcing today, and that’s really what the purpose of it is.