State of Illinois Owes $730 Million in Corporate Tax Refunds

August 19, 2010

It’s no secret that the financially troubled State of Illinois owes billions of dollars in unpaid bills. What is not as widely known is that the State also owes $730 million in corporate income tax refunds, according to the Illinois Department of Revenue.

Unlike unpaid bills, unpaid tax refunds are not accounted for in the budget. The budget specifically shows unpaid bills as accounts payable at the end of the year. The State is expected to end both FY2010 and FY2011 with $6.6 billion in unpaid bills. The backlog of tax refunds is discussed in the text of the budget and disclosed in the State’s bond offering documents dated July 14, 2010.

As of June 30, 2010, unpaid but approved corporate income tax refunds were at $690.9 million, the highest level on record, according to the Department of Revenue. Unpaid but approved personal income tax refunds were much lower, at $43.6 million. The following chart shows the approved but unpaid refunds at the end of each fiscal year between FY1989 and FY2010.

Since June 30, 2010, all approved personal income tax refunds have been paid. The Department of Revenue decides how the money in the Refund Fund is spent and makes it a priority to pay personal refunds, officials said. In FY2010, the State paid $1.3 billion in refunds to nearly 4 million individual taxpayers.

However, the State has paid only a small fraction of the dollar value of approved corporate income tax refunds since June of 2009. A limited number of hardship cases, in which a company needed its refund to prevent layoffs or keep the doors open, were paid in FY2010. In August of 2010, roughly $4.2 million of the smallest 30,000 corporate income tax refunds were sent to the Illinois Comptroller’s Office for processing. Afterwards, more corporate claims were added to the backlog of approved but unpaid refunds.

As of August 18, 2010, approved but unpaid corporate income tax refunds stood at $730 million and were owed to approximately 25,000 companies. The State is required to pay interest at an annual rate of 4% on refunds more than 90 days overdue.

The corporate income tax refund backlog has reached record levels because claims have risen and the amount of money transferred into the State’s Income Tax Refund Fund has declined, according to the State’s bond offering documents. The Refund Fund was created in 1989. Both corporate and personal income tax refunds are paid from the Refund Fund rather than from the State’s General Funds, which support the regular operating and administrative expenses of most state agencies.

As the State collects income taxes, a certain percentage is diverted from General Funds and deposited into the Refund Fund. The percentage diverted, or Refund Fund rate, has been set by statute. Separate Refund Fund rates are set for personal and corporate income taxes.

For personal income taxes, the Refund Fund rates for FY2008, FY2009 and FY2010 were set at 7.75%, 9.75% and 9.75%, respectively. In the FY2011 Budget Implementation Act (Public Act 96-959), the Refund Rate for personal income taxes was lowered to 8.75%, despite the backlog of refund claims.

For corporate income taxes, the Refund Fund rates for FY2008, FY2009 and FY2010 were set at 15.5%, 17.5% and 17.5%, respectively. The FY2011 budget also adopted a 17.5% rate, despite the backlog of refund claims.

Meanwhile, the economic recession has caused the State’s personal income tax receipts to decline 15.7% from $11.2 billion in FY2008 to $9.4 billion in FY2010, according to the General Assembly’s Commission on Government Forecasting and Accountability. Corporate income tax receipts fell 25.1% from $2.2 billion in FY2008 to $1.6 billion in FY2010.

In the State’s recent bond offering documents, the Governor’s Office of Management and Budget estimated the corporate income tax refund backlog at $1 billion by the end of FY2010 and $1.4 billion by the end of FY2011.

The financial condition of the Refund Fund is complicated by a requirement involving personal property replacement income taxes. Personal property replacement income taxes are taxes levied by the State on companies and paid to local governments to replace money that was lost by local governments when their powers to impose personal property taxes on businesses were taken away. A portion of replacement taxes is also placed in the Refund Fund to pay for tax refunds; the same Refund Rate used for corporate income tax refunds is also used for replacement tax refunds.

Under the Illinois Income Tax Act, any replacement tax receipts in excess of replacement tax refunds paid must be transferred to the Personal Property Tax Replacement Fund after the end of each fiscal year. The Replacement Fund receives replacement taxes from the General Funds.

According to the Department of Revenue, roughly $180 million is currently owed from the Refund Fund to the Replacement Fund. The money is expected to be transferred in September or October of 2010 as funds become available.