January 12, 2015
To the Honorable Members of the
Illinois Senate, 98th General Assembly:
In accordance with
Article IV, Section 9(e) of the Illinois constitution of 1970, I hereby return Senate
Bill 3397 with a specific recommendation for change.
The General Assembly
enacted this legislation during its fall session late last year. The purpose of
the legislation is to eliminate the sales tax liability of retail merchants for
transactions in which customer purchases an item using the retailer’s “private label”
credit card, but later fails to make the required payments and defaults on that
credit card. A “private label” credit card is a credit account that may only be
used for transactions at a specific retail merchant. “General purpose” credit
card accounts, in contrast, enable the customer to transact with a wide
universe of different merchants.
Under current law, merchants
must pay the State the total amount of sales tax due at the time of a retail
transaction. The proponents of this legislation complain that retailers are
suffering economic harm because current law makes no provision for the retailer
to recover sales tax payments in the situation where the customer used a
private label credit card to purchase an item but later defaulted by failing to
make the required payments.
Essentially the retail
merchant incurs two losses – (1) the merchant has already paid the whole amount
of the sale tax due at the time of the transaction, even though (2) it has
never been and likely never will be paid for the retail transaction by the
customer. The proponents argue that the law should regard these transactions as
having never occurred. Their proposed remedy, accordingly, as set forth in
Senate Bill 3397, is to provide retailers in this situation a deduction or
refund for the amount of sales tax payment once the account is deemed
uncollectable.
Opponents of the
legislation, however, point out that private label credit cards charge
customers onerous interest rates on credit balances carried month-to-month,
along with other high fees and charges for things such as late payments. The
combination of very high rates of compound interest along with an array of high
fees and charges make private label credit cards very lucrative for retailers and
the financial institutions they partner with to create these products. Correspondingly,
the effect to consumers is often to exponentially increase the overall
The opponents of this
measure further point out that these profits compensate the retail merchant for
the economic cost of sales taxes paid for card purchases that later go
uncollectable. In other words, in these situations, merchants effectively
recover their losses through private label credit card profits.
Final passage of this
legislation occurred on December 4, 2014. This was exactly one month after the
November 4, 2014 general election in which the people of Illinois approved by
an overwhelming majority a non-binding statewide referendum calling for an
increase in the State’s minimum wage to $10 per hour beginning January 1,
2015.
Although the Illinois
Senate responded to the unambiguous message of the electorate by passing a bill
to increase the minimum wage, the House of Representatives failed to consider
the measure during the fall veto session. Instead of even considering the
Senate proposal the House instead adjourned sine die.
This is a great irony.
Despite overwhelming
support from every part of the State for a measure that provides much needed
assistance to working families raising children, the House of Representatives
would not act. But the House of Representatives did find time – right before
the holiday season - to give a lucrative tax benefit to retail merchants and
the financial institutions they partner with, thus enabling this class of
highly profitable businesses to become even more highly profitable.
It is questionable
whether affording the deduction or refund provided for in Senate Bill 3397 is
sound public policy. The extent of the uncompensated economic harm to these
businesses resulting from customers defaulting on their private label credit
cards is debatable: how much of the sales tax payments for uncollectable
transactions are recovered through credit card profits?
What is clear, however,
is that Illinois working families raising children deserve targeted tax relief.
If the General Assembly can find the will to give a dubious tax break to
profitable businesses, the General Assembly can and should find the will to
provide meaningful tax relief to hardworking families living on modest incomes.
Accordingly, I propose a
specific recommendation for changing this legislation by adding a new provision
doubling the Earned Income Tax Credit from its current level of 10% of the
federal credit to 20%, effective immediately.
By inserting on Page 1,
immediately below line 3, the following:
“The
Illinois Income Tax Act is amended by changing Section 212 as follows:
Sec. 212. Earned income tax
credit.
(a) With respect to
the federal earned income tax credit allowed for the taxable year under Section
32 of the federal Internal Revenue Code, 26 U.S.C. 32, each individual taxpayer
is entitled to a credit against the tax imposed by subsections (a) and (b) of
Section 201 in an amount equal to (i) 5% of the federal tax credit for each
taxable year beginning on or after January 1, 2000 and ending prior to December
31, 2012, (ii) 7.5% of the federal tax credit for each taxable year beginning
on or after January 1, 2012 and ending prior to December 31, 2013, and (iii)
10% of the federal tax credit for each taxable year beginning on or after
January 1, 2013 and ending prior to December 31, 2015, (iv) 12% of the
federal tax credit for each taxable year beginning on or after January 1, 2016;
(v) 14% of the federal tax credit for each taxable year beginning on or after
January 1, 2017; (vi) 16% of the federal tax credit for each taxable year
beginning on or after January 1, 2018; (vii) 18% of the federal tax credit for
each taxable year beginning on or after January 1, 2019; and (viii) 20% of the
federal tax credit for each taxable year beginning on or after January 1, 2020.
For a non-resident
or part-year resident, the amount of the credit under this Section shall be in
proportion to the amount of income attributable to this State.
(b) For taxable
years beginning before January 1, 2003, in no event shall a credit under this
Section reduce the taxpayer's liability to less than zero. For each taxable
year beginning on or after January 1, 2003, if the amount of the credit exceeds
the income tax liability for the applicable tax year, then the excess credit
shall be refunded to the taxpayer. The amount of a refund shall not be included
in the taxpayer's income or resources for the purposes of determining
eligibility or benefit level in any means-tested benefit program administered
by a governmental entity unless required by federal law.
(c) This Section is
exempt from the provisions of Section 250.”
With
this change, SB 3397 will have my approval. I respectfully request your
concurrence.
Sincerely,
PAT
QUINN
Governor
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