Tomorrow, the Illinois Senate is expected to vote on the third version of a compromise promise to help end the state’s almost two-year-long budget crisis. Yet again, the proposed compromise makes Illinois’s 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. climate less competitive.
The newest version of the plan includes a few key components:
- 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 is increased to 4.99 percent
- 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 is increased to 7 percent (plus the 2.5 percent personal property replacement tax)
- Expands the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. base to include a few services, such as storage and amusement
- Creates a statewide payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. , called the “business opportunity tax”
- Repeals the state’s franchise tax
The new version removes the previously discussed statewide sugary beverage tax, and has a lower individual income tax rate than previous versions.
The business opportunity tax is the most unique part of this proposal. Only one state (Nevada) has a statewide payroll tax that isn’t related to unemployment insurance. The proposal in Illinois would tax employers a flat fee based on their total payroll in the state.
|
Total Illinois Payroll |
Tax Amount |
|---|---|
|
>$100,000 |
$225 |
|
$100,000-$250,000 |
$750 |
|
$250,000-$500,000 |
$3,750 |
|
$500,000-$1,500,000 |
$7,500 |
|
$1,500,000+ |
$15,000 |
According to the Capitol Fax in Illinois, 100,000 businesses in the state have payroll of less than $100,000, putting a large burden on a number of very small employers. And this would be on top of the newly-increased 9.5 percent corporate income tax rate, the fourth highest rate in the country.
Similar to the previous two versions of this plan, Illinois’s ranking on the State Business Tax Climate Index would fall. Illinois’s overall score would fall from 23rd to 28th, while the corporate income tax component would fall from 26th to 42nd.
|
Current |
Proposal |
|
|---|---|---|
|
Total |
23 |
28 |
|
Corporate |
26 |
42 |
|
Individual |
10 |
11 |
|
Sales |
35 |
34 |
|
Property |
46 |
41 |
These scores come with a very large caveat. The State Business Tax Climate Index does not include any variables regarding a statewide payroll tax, since they are not common among the states.
Repealing Illinois’s franchise tax would be a step in the right direction, but other components of this updated proposal should continue to give Illinois policymakers pause. Creating a brand-new statewide payroll tax and raising the state’s corporate income tax rate to 9.5 percent would be a step in the wrong direction.
Information on the previous versions of the compromise:
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