Illinois Budget Proposal | Tax on GILTI

Just one day after it was unveiled to the public, Illinois’ budget for fiscal year (FY) 2026 passed the House and Senate. Now, Gov. JB Pritzker (D) has the rest of June to decide whether to sign the budget, veto it, or issue amendatory or line-item vetoes. The governor recently said he would veto a budget that includes broad-based taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
increases, with media outlets reporting he said he would specifically veto tax increases on individuals or corporations. The budget lawmakers sent the governor does, indeed, include significant tax increases on businesses, leaving room for the governor to strike such tax increases from the bill. Two substantial corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
base changes that are worth reconsidering are the proposed new tax on GILTI and the proposed change from Joyce to Finnigan rules for combined reporting.

State Taxation of GILTI

If Illinois’ budget is enacted as-is, Illinois will newly tax 50 percent of Global Intangible Low-Taxed Income (GILTI) as of tax year 2025, retroactively increasing tax burdens for US businesses and further hindering Illinois’ business tax competitiveness. To understand why state taxation of GILTI is inappropriate and economically harmful, it is first helpful to understand the role GILTI plays within the federal corporate income tax code.

As part of the shift from a worldwide to a quasi-territorial tax systemTerritorial taxation is a system that excludes foreign earnings from a country’s domestic tax base. This is common throughout the world and is the opposite of worldwide taxation, where foreign earnings are included in the domestic tax base.
, the 2017 federal tax reform law created a new category of income, GILTI, and taxed it at a lower rate than the ordinary corporate income tax rate. GILTI was established to combat federal corporate income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
erosion by imposing a minimum tax on offshore profits, particularly those arising from offshore intellectual property holdings, and making it more attractive for US corporations to repatriate foreign earnings instead of indefinitely holding those profits offshore.

Notably, GILTI is a proxy for the profits earned by US multinational corporations on patents, trademarks, copyrights, and other forms of intangible assets held in foreign countries; the tax on GILTI does not apply directly to profits from intangible assets but rather to high (“supernormal”) rates of return, which the law’s drafters associated with royalty income from intangible assets. Similarly, the determination of whether such income is only subject to low foreign taxes—a possible sign of profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens.
—is complex and does not always align with foreign tax burdens actually being low.

In essence, GILTI is a category of foreign income of US multinational companies from which a minimum tax is collected and sent to the US Treasury, despite the TCJA’s broader shift away from taxing international income. Illinois legislators, however, are proposing moving in the opposite direction by taxing this form of international income for the first time.

While GILTI plays a functional role within the broader structure of the federal corporate income tax code, state taxation of GILTI is inappropriate, economically harmful, and—although states have taxed GILTI without a successful challenge to date—at least potentially constitutionally dubious. Traditionally, state taxation stops at the “water’s edge,” meaning state corporate income taxes typically apply only to income earned within the United States, not to foreign income. Taxing GILTI is therefore far beyond the traditional scope of state taxation. Furthermore, state taxation of GILTI increases the in-state tax burdens of US multinational companies for reasons having nothing to do with the company’s activities in the state (or even in the US).

At the federal level, GILTI is taxed at a preferential rate to encourage companies to repatriate foreign earnings, and GILTI functions in tandem with other provisions Illinois lacks, like the credit for foreign taxes paid. Consequently, not only does conformity to GILTI involve state taxation of international income, but it yields a far more aggressive international tax regime than the one implemented by the federal government. Moreover, its purpose—to discourage profit shifting—is not served by inclusion in state tax codes.

Another reason Illinois and other states should avoid taxing GILTI is because doing so potentially violates the US Constitution’s Dormant Commerce Clause, which prohibits states from enacting laws that discriminate against or unduly burden interstate commerce. When states tax GILTI, they effectively impose a higher tax on foreign income than on domestic income, which directly affects interstate and international business activities.

To date, Illinois has been able to retain a relatively large number of Fortune 500 companies despite having the third-highest corporate income tax rate in the United States because its corporate rate applies only to profits generated from in-state sales. Taxation of GILTI, however, would incentivize such businesses to reduce their exposure to Illinois’ tax system, instead prioritizing operations in the 28 other states that do not tax GILTI or do not levy a corporate income tax. While Illinois’ budget seeks to mimic Minnesota, which has the second-highest corporate income tax rate in the country and recently added GILTI to its corporate tax base, it is noteworthy that New Jersey, which has the highest top marginal corporate income tax rate in the country, recently moved largely away from taxing GILTI, reducing its GILTI inclusion from 50 to 5 percent.

Taxation of GILTI would further hinder Illinois’ already dismal business tax competitiveness. If Illinois had included 50 percent of GILTI in its corporate income tax base as of the snapshot date for our 2025 State Tax Competitiveness Index, Illinois’ rank would have been two places lower, at 39th overall rather than its current 37th. Furthermore, the budget’s proposed taxation of GILTI starting in tax year 2025 represents a surprise retroactive tax increase that penalizes businesses for activities and decisions undertaken long before the consideration of this budget.

Joyce to Finnigan Conversion

Illinois’ budget also seeks to raise additional corporate income tax revenue by converting from Joyce to Finnigan rules for combined reporting. Under Joyce, a corporation is determined to be taxable in Illinois only if the corporation itself possesses corporate income tax nexus with Illinois, but if Illinois converts to Finnigan rules, a corporation will be taxable in Illinois if any member of its unitary group has nexus with Illinois. This means that more companies that are not currently subject to Illinois’ corporate income tax will be subject to it if they make sales in Illinois and a member of their unitary group has nexus with Illinois.

However, such a policy change loses revenue from other businesses, as this rule change could also reduce the amount of income taxed under Illinois’ throwback rule. Currently, when Illinois-based companies generate “nowhere income” by selling into states with which they lack nexus, that income is “thrown back” into the numerator of Illinois’ single-sales factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders.
formula and is taxed by Illinois. However, if Illinois converts to Finnigan rules and a company based in Illinois sells into a state with which it lacks nexus, income from such sales will no longer be taxable in Illinois if another affiliated member of the unitary group has nexus with that destination state.

Whichever choice Illinois makes on its combined reporting rules will cut both ways on tax authority, but Joyce rules are typically simpler to comply with and do a better job of ensuring that the businesses that remit corporate income tax revenue to Illinois are those that have relatively stronger ties to Illinois.

Conclusion

The corporate income tax base changes in Illinois’ budget, if enacted, will lead to substantial tax increases for certain businesses. Ultimately, corporate tax increases such as these create economic distortions by influencing business decision-making and creating an incentive for businesses to minimize taxable activity in Illinois. To the extent businesses do end up paying higher taxes, it is important to keep in mind that while corporate income taxes are remitted by corporations, the economic burden of corporate income tax increases falls on consumers in the form of higher prices, on employees in the form of lower wages and fewer job opportunities, and on investors in the form of lower returns. Gov. Pritzker should thoroughly consider these negative outcomes before putting his stamp of approval on such tax increases.