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.
Over this summer, my colleague Mark Robyn testified to Illinois officials, urging them to reconsider the tax increases and focus instead on building a good business climate and get a handle on their spending. Legislators seemed receptive, as Gov. Pat Quinn’s (D) approach of offering targeted incentive packages to specific businesses is unlikely to make up for the high taxes, higher spending, and accumulating debts.
Yesterday, Quinn and legislative leaders agreed to a package that mostly nibbles around the edges:
- “Decouple” from federal bonus depreciation retroactive to January 1, 2011, thereby increasing the difference between federal business income and state business income. This is an accounting gimmick that allows Illinois to once again postpone the day of reckoning, as it does not increase revenue but rather shifts it from the future into the present. Raises $570 million.
- Extend the Research & Development credit by five years, effective January 1, 2011. Approve new targeted incentive packages for the Chicago Mercantile Exchange and Sears.
- Reinstate the net operating loss provision, effective January 1, 2012.
- Reduce LLC filing fees from $750 to $100, effective January 1, 2012.
- Increase the estate tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. from $2 million in 2011 to $3.5 million in 2012 to $5 million in 2013.
- Increase the Earned Income Tax Credit (EITC)The Earned Income Tax Credit (EITC) is a refundable tax credit targeted at low-income working families. The credit offsets tax liability, the total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority like the Internal Revenue Service (IRS), and can even generate a refund, with earned income credit amounts calculated on the basis of income and number of children. from 5% in 2011 to 10% in 2012 and 15% in 2013.
- InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. -adjust the personal exemption.
The Illinois Policy Institute has this chart showing job growth in the state before and after the tax increases were approved:Share