Illinois Tax Increases Will Undermine Job Growth and Economic Recovery

 
 
January 12, 2011

Legislature Passes Steep Hikes on Individual, Corporate Income

Washington, DC, January 12, 2011-Late last night the Illinois state legislature approved a plan to significantly increase individual and corporate income tax rates in order to help close a $13 billion budget deficit. According to a new analysis by the Tax Foundation, however, this change would discourage new investment and business development in Illinois and put the state at a competitive disadvantage among its neighbors.

The plan, which awaits the signature of Gov. Pat Quinn, raises the individual income tax by two-thirds and increases the corporate tax rate by 30%. These rate increases are slightly lower than the package originally proposed, which would have raised individual and corporate tax rates 75% and 49%, respectively, and increased the cigarette tax by one dollar a pack.

"These changes are definitely going to impact Illinois's attractiveness to business and individuals," said Tax Foundation Director of State Projects Joseph Henchman. "The state legislature obviously needs to address the state's budget deficit, but the solution should include a top-down reassessment of public services rather than simply pushing rates as high as politically possible."

The tax increases are projected to raise an additional $6.5 billion in revenue for 2011, and be coupled with a two percent annual limit on the growth of state spending through the 2015 fiscal year. If the state's budget exceeds the agreed on limits, tax rates would revert to current levels.

"Illinois's tax climate ranked 23rd in the country last year in terms of favorable places to do business, but that ranking has now dropped to 36th—a sign that the state has, overnight, become a significantly less attractive place to invest," said Tax Foundation Staff Economist Kail Padgitt. "The new corporate tax hikes will give the state the fourth-highest rates in the country, undermining the state's ability to foster business development—in particular relative to its lower-tax neighbors like Indiana and Missouri."

Tax increases this severe will likely only accelerate the trend of Illinois losing out economically because of the outbound migration of taxpayers to other states. According to the Tax Foundation's State-to-State Migration Calculator, Illinois lost almost $32 billion in income on net from residents who moved to other states between 1993 and 2008.

Tax Foundation Fiscal Fact #256, "Illinois Approves Sharp Income Tax Increase, Fourth-Highest Corporate Tax Rate" by Joseph Henchman and Kail Padgitt is available here.

Note: This report was revised on January 18, 2011 to account for a correction to the method of calculating Iowa’s effective corporate income tax rate. Iowa’s statutory rate is 12%, but lower due to partial federal deductibility. After accounting for the correction, Iowa’s effective rate is higher than Illinois’s new rate, meaning that Illinois will have the fourth-highest corporate income tax, instead of third-highest as previously reported.

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