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Illinois Should Keep the Good Part of Its Tax System

By: Mark Robyn

The Illinois Comptroller is calling for a progressive income tax in the state. Right now the state has a flat income 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. equal to 3% of adjusted gross income. Some people say this is fair, some say it isn’t. We would note that Illinois has an earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. that makes the state’s system at least somewhat progressive. And if progressivity is really the issue, why not lower the rates for low income taxpayers and cut some of those distortionary incentives like film tax credits, business and economic development credits, and R&D credits? This would eliminate costly and unjustifiable tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s while allowing the state to keep its income tax rate low.

Illinois’ income tax is one of the few good things about the state’s tax system. In our 2009 State Business Tax Climate Index Illinois ranked 23rd overall, right in the middle. But in the subcategories the only good score that Illinois received was for its personal income tax. It ranked worse than average for 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. es and rather poorly in property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, 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. es, and unemployment insurance taxes.

It would be a bad move for Illinois policy makers to increase the only tax they have that even keeps them looking mediocre nationally. The state should be striving to be an attractive destination for business (many of which file under the personal income tax code) and entrepreneurs, not a place that high income individuals will try to avoid.

The Governor says that any income tax increase will likely have to wait until February.