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State memo: Tax bill may not survive constitutional, fed challenges

State Rep. Jeanne Ives at a 2014 news conference. File Photo. | Rich Hein/Sun-Times

SPRINGFIELD — In perhaps a preview of how difficult it will be to clear a controversial budget plan through the Illinois House, the state’s Revenue Department in a memo on Wednesday said three provisions in the tax package may violate the state’s Constitution and federal laws.

Illinois Senate Democrats who passed three budget bills on Wednesday, immediately pinned the state analysis on the governor.

The analysis by the Illinois Department of Revenue was requested by state Rep. Jeanne Ives, R-Wheaton, who pre-filed paperwork to sponsor the revenue bill in the House in February. Ives is staunchly against an income tax hike and has spoken out about the need for property tax reform, which is now Gov. Bruce Rauner’s top priority. Rauner has said he’ll only approve an income tax hike if it’s paired with a property tax freeze.

There are other provisions in place that can allow Democrats to use other House or Senate bills to try to push the revenue package. But for now, Ives remains the sponsor.

The revenue bill that cleared the Senate with Democratic votes on Wednesday — and was largely criticized by the GOP — would increase the personal income tax to 4.95 percent from the current 3.75 percent to generate $4.453 billion annually. There’s also a bump in the corporate income tax to 7 percent from 5.25 percent, which is expected to generate $514 million annually.

The bill also eliminates three corporate tax loopholes worth a combined $125 million a year. A sales tax on services would generate $55 million. And cable, satellite and streaming services would be taxed through a franchise tax, not a sales tax.

At issue, according to the revenue memo, are three factors in the bill: service taxes on storage, laundry and dry cleaning, private detective services, private alarm and private security services; a 1 percent tax on subscribers of entertainment, including cable; and a 5 percent tax on providers of direct-to-home satellite services, direct broadcast satellite service and digital audio-visual work.

The sales tax on services, as is, would generate $55 million. And the cable, satellite and streaming services tax, through a franchise tax, would generate $54 million, according to Democrats’ analysis of the bill.

“It is the Department’s opinion that there is a substantial risk that the service tax components violate the uniformity clause of the Illinois Constitution,” the state’s revenue general counsel Mark Dyckman wrote in a memo on Wednesday.

Dyckman writes that “any service tax that simply picks and chooses services at random to be taxed or exempt from tax runs this substantial risk of being unconstitutional.”

The tax for entertainment subscribers could be challenged under the Federal Internet Freedom Act, which prohibits states from imposing “discriminatory taxes on electronic commerce.” He notes that while people would be taxed for renting movies on an Internet or cable program, they wouldn’t be taxed for renting them from a video store.

The tax on the satellite services may be challenged by satellite service providers, who may argue that the tax would be discriminatory because it doesn’t tax cable companies, the memo says. The memo notes that it, too, could violate the state’s uniformity clause.

Senate Democrats noted Rauner had recommended service taxes.

“Yikes! How’d the governor take that news? Sales taxes on services have been part of his economic agenda going back to 2014,” said John Patterson, spokesman for Illinois Senate President John Cullerton. “I’m sure he can get this resolved with his Revenue Department.”

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