Illinois Tax Hike Would Cost 20,000 Jobs, Per Department of Revenue

May 04, 2016

With a vote looming on an Illinois bill (HB 689) that would impose a graduated income tax with a top rate of 11.25 percent on pass-through businesses (previous coverage here and here), the Illinois Department of Revenue has dropped a fiscal note with grim news for the legislation’s proponents. The fiscal note anticipates that within four years of the legislation’s enactment, the private sector would lose 20,000 jobs, more than 43,000 people would move out of Illinois for tax reasons, and gross state product would contract by $1.9 billion.

Incidentally, $1.9 billion is also how much proponents expect the bill to raise in additional revenue. What the Department of Revenue is saying is that for each dollar transferred from the private sector to state coffers, an additional dollar disappears from the economy altogether due to the tax hike’s economic drag. It was just two days ago that the bill’s sponsor argued that the tax increase would boost the state’s economy.

House Bill 689 is billed as a tax cut for the vast majority of taxpayers while still increasing state revenue by as much as $1.9 billion, a figure that the Department of Revenue has not publicly confirmed. We have previously highlighted the degree to which the proposed legislation exposes many businesses—particularly small- and medium-sized businesses—to higher taxes, and the adverse effects of such a policy on all Illinoisans. Even to the extent that the bill offers a modest cut for many individual income tax payers, however, the cut is short-lived. If the state did nothing, the individual income tax rate would fall to 3.25 percent in 2025. The pending legislation eliminates that future sunset, instead setting the lowest rate at 3.5 percent in perpetuity. At a press conference yesterday, moreover, House Deputy Majority Leader Lou Lang (D) conceded that, should the constitution be amended to allow a graduated-rate tax, the proposed rates in the companion bill might need to change (either now or in the future), raising taxes on a broader range of taxpayers.

Today is the deadline for action on graduated-rate taxation for Illinois, making the Department of Revenue’s fiscal note all the more salient.

UPDATE: The constitutional amendment will not be on the ballot this year. With the legislature's ajournment for the day, the Senate has run out of time to meet the constitutional reading requirements for an amendment in time to meet the constitutionally-imposed deadline.

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