Illinois Launches 20% Privilege Tax at Financial Professionals

Perhaps a little more often lately, you come across pending legislation in which you can actually feel a politician stick his hand into your pocket and help himself to your wallet. Such a reaction is understandable after you read Illinois House Bill 3393, popularly called the “Illinois Privilege Tax” because it plans to charge investment professionals an extra 20% on their services rendered.

The specifics of the Illinois privilege tax contain the following provisions:

  • Partnerships and s-corporations that provide investment services would be subject to the tax.
  • The original bill stated that the privilege tax would be subject to repeal once the United States federal government removed the lower tax rate on carried interest, though the amended version contains no such expiration.
  • The test for whether a partnership or s-corporation is subject to the tax is whether it derives more than 40% of its income from “advising as to assets”, “managing or disposing of client assets”, “arranging financing or planning over public securities”, or “any any activity that supports the service of asset management.”
  • “Assets” are defined to mean real estate rental or ownership, publicly traded stocks, bonds issued from governments or any business, commodities, options, derivatives, or “any other financing that shares these characteristics.”
  • Partnerships and s-corporations are excluded from this bill if at least 80% of their income comes from the management of real estate.
  • This tax is in addition to all taxes that partnerships and s-corporations are already obligated to pay.
  • The original version stated that the law would not take effect until New York, New Jersey, and Connecticut all passed “substantially similar” legislation on financial professionals, but the amended version merely states that it will take effect on July 1, 2017 and there is no clause limiting when it takes effect or sets it for expiration.

The Illinois Privilege Tax aims to tax financial professionals at a rate of 20%. The definitions of the target audience is too overbroad and the tax hike is so extreme that it will need to a substantial counter-response from the business community if this legislation is enacted.

My takeaways:

#1. Specially targeted taxation generates a special kind of resentment. There is a reason why, when you visit a restaurant, the costs of your cheeseburger are not itemized. You don’t get charged $0.25 for ketchup, $.50 for a pickle, $0.25 for lettuce, $0.25 for tomato, and so on. That is the same reason why it is rare to see restaurants that charge $0.50 for a refill. Such targeting and nickeling and diming feels like extortion, even if the cumulative cost for the burger is the same as a place that just charges $10 regardless of your toppings.

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