Who Would Pay a Higher Illinois Income Tax?

March 25, 2014

This morning we released a new report by my colleague Liz Malm, on how a proposed Illinois tax increase would affect small businesses and job creation.

For several months, there has been buzz in Illinois political circles about a progressive income tax, timed to prevent the scheduled drop in the state's current flat income tax from 5% to 3.75% at the end of this year. Last week, House Speaker Michael Madigan put out a plan that would impose a top rate of 8% on income over $1 million. Other leading plans have top rates as high as 11%, increasing taxes on all taxpayers.

Here are some key findings of our new report:

  • 61 percent of employers in Illinois are pass-through entities (individual proprietors, partnerships, and S corporations), meaning they pay business taxes through the individual income tax. Implementing a graduated, or progressive, rate structure would increase taxes on many of these businesses.
  • Pass-through employers employ 38 percent of Illinois employees. This varies widely by industry, with the highest concentrated in the construction sector (78% of employers and 65% of employees); professional, scientific, and technical services (77% of employers and 53% of employees); agriculture, forestry, fishing, and hunting (73% of employers and 47% of employees); administrative and support and waste management services (70% of employers and 55% of employees); real estate and rental and leasing services (70% of employers and 54% of employees); and transportation and warehousing (68% of employers and 30% of employees).
  • Pass-throughs tend to be smaller in size, with the majority of pass-through employers employing less than 10 people.
  • The Illinois economy is underperforming in comparison to other states in the region and the country as a whole. Experts express caution over using taxes as a solution to the state’s large and rising pension debt.

While most people think taxes on "millionaires" only affect wealthy heirs with trust funds, the reality is that most Illinois employers, employing a large proportion of Illinois workers, pay taxes through the individual tax code. Increasing their taxes directly affects job creation and economic growth.

Illinois already has one of the highest state-local tax burdens in the country, and while it has fiscal challenges, it should try to address them without destroying one of the best features of its tax code: a low, simple income tax.

Check out the full report here.

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