Running in Circles: Illinois’ Failed Experiment with Tax Hikes and Credits

June 08, 2012

In early 2011 the Illinois legislature passed a significant tax increase, which raised tax rates precipitously on both individual and corporate income. In the aftermath of the hike, the state suffered as businesses with large capital reserves and mobile resources (Sears is one example) threatened to pack up and leave for more competitive tax regimes in neighboring states. The solution that Illinois put into effect was a regime of tax credits and rebates, to be applied and handed out as development offices saw fit.

Now, the state is responding to concerns of abuse of these credits by approving HB 3859 and HB 3934 as a means of increasing transparency in these governmental relationships. Transparency is certainly a laudable goal, but under these circumstances the legislators of Illinois are missing the broader point: a policy of uncompetitive marginal rates will always lead to a weakened business community, which will in turn lead to widespread job and productivity losses.

This pattern of incentives created by high marginal rates is observable in Illinois and across the country. Sears is a hallmark company that has deep ties to the state, by holding a sympathetic press conference they can essentially hold the state hostage by threatening to pack up and leave, lest special tax credits be directed towards them.  Illinois is in a bind, with uncompetitive tax rates their economy is scaring off potential and existing sources of employment, yet by then retroactively pairing down these rates via tax rebates the issue of transparency rightly comes to the forefront.

The prudent solution would be to lower the rates for both individuals and businesses, creating a natural incentive for production and employment, while removing the problem of tax deals that favor certain well-connected industries or companies at the expense of the state’s economy as a whole. Illinois’ current corporate income tax rate of 9.5% ranks amongst the highest in the nation, and is uncompetitive in comparison to the neighboring states that compete with it for access to labor and capital markets. Until such high rates are reduced, states like Illinois will continue to run in circles trying to fix problems created by unsound tax policy. The table below shows top marginal corporate tax rates of Illinois and its neighbors:

State Top Corporate Income Tax Rate (2012)
Iowa 12%
Illinois 9.50%
Wisconsin 7.90%
Missouri 6.25%
Michigan 6%
Kentucky 6%

For more on Illinois, click here.

Follow Scott Drenkard on Twitter @ScottDrenkard.

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