In January, Illinois legislators approved raising their individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate from 3% to 5%, and raised the 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. rate from 7.3% to 9.5%, retroactive to January 1. (Some state officials mislead reporters by stating that their corporate 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. went from 4.8% to 7.0%, by not including a separate 2.5% tax on corporate income.) While the proposal was under debate, we noted that the increase would result in Illinois having one of the highest corporate income taxes in the industrialized world, and would hurt their score in our annual State Business Tax Climate Index.
While the Progressive States Network as recently as yesterday applauded Illinois’s “responsible approach,” everyone else seems to be having second thoughts after experiencing the effects of the tax increases. Yesterday, House Speaker Michael Madigan (D) and Senate President John Cullerton (D) announced a legislative review of the state’s business tax structure:
“We need to take a holistic approach to business taxes as opposed to the continued piecemeal policies that often pit one business against another,” said Cullerton, also in a prepared statement.
Since the state raised the corporate income tax along with the personal income tax earlier this year, there have been constant reports of states trying to lure Illinois businesses away with promises of lower taxes. The head of CME Group said last week the Chicago Mercantile Exchange will be particularly hard hit by the tax increase because it doesn’t qualify for exemptions available to other companies.
An embarrassed Gov. Pat Quinn has reacted to the threat of those departures by belittling the governors of those other states and by awarding rich incentive packages to corporations that agree to stay. The former reaction looks desperate; the latter puts Quinn in the role of picking winners who get his giveaways – and the losers whose inflated taxes pay the costs.
At one time, experts debated whether state taxes had any impact on individual and business location decisions. While that may have been questionable at a time of 70% or 90% federal tax rates, the consensus now is that taxes matter, and that they change behavior. I hope Illinois will turn this realization into something that will position the state for better growth.Share