There are several tax plans floating around Illinois right now, in particular ones that would fundamentally alter the state’s single-rate individual income tax. The most recent proposal, put forth by House Speaker Michael Madigan, would impose a 3 percent surcharge on incomes over $1 million.
I wrote earlier this week that Illinois residents should be aware that individual income taxes don’t just impact individuals. They also have effects on businesses:
A large share of Illinois employers would be impacted by this 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. legislation, since 61 percent of employers in the state are pass-through entities. This includes a large number of small businesses and firms in several of the state’s key industries.
Though we cannot know the exact portion of that 61 percent that would be impacted by the Speaker’s surcharge due to data limitations (the Census dataset I used in my report only reports the total payroll of these employers, not the total receipts or income), we can make a reasonable estimation based on IRS data for Illinois.
In particular, we can look at the IRS Statistics of Income 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. data for Illinois, which breaks down federal adjusted gross income (AGI) in each state by AGI range. Two income categories are relevant here, and they’re listed in the table below.
My colleague Kyle Pomerleau made an important point last year:
It is often assumed that a tax increase on high-income individuals will have little impact on business activity because only two or three percent of taxpayers with business income are taxed at the highest rates. This statistic is misleading. The more economically meaningful statistic is how much overall business income will be taxed at the highest rates.
Individual Income Tax Data: Illinois, Tax Year 2011
|
Income Category |
Number of Pass-Through Business Tax Returns with AGI above $1 Million (in this Income Category) |
Total Pass-Through Business Income with AGI of $1 Million or More (in this Income Category) |
Share of Total Pass-Through Business Returns with AGI of $ 1 Million or More (in this Income Category) |
Share of Total Pass-Through Business Income with AGI of $ 1 Million or More (in this Income Category) |
|
Partnership/S corporation net income (less loss) |
11,208 |
$9,670,530,000 |
3.0% |
54.0% |
|
Business or profession net income (less loss) |
3,666 |
$674,211,000 |
0.4% |
6.4% |
| Total Pass-Through Business Income | 14,874 | $10,344,741,000 | 1.2% | 36.2% |
Source: IRS Statistics of Income
According to the IRS definition document, these categories include the profit or loss that flowed through to the owner’s (or owners’) tax return, since these entities are pass-throughs. The first category includes the taxable income from partnership and S corporations, while the second includes sole proprietorships.
These data indicate that:
- 54 percent of total partnership and S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. in Illinois would be impacted by Speaker’s Madigan’s millionaire surcharge. That’s almost $10 billion of business income.
- 6 percent of sole proprietorships AGI would be impacted. Important to note here is that not all sole proprietorships earn small amounts of income. Over three thousand would be hit by the millionaire tax, impacting $674 million of income.
- Taken together, this indicates that 36 percent of pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income is earned at firms with AGI with $1 million or more.
Though these appear to be a small share of total returns in each income category, the economic importance of these businesses shouldn’t be understated. This represents over $10 billion of income and economic activity, which is no small change.
See our recent piece on the Illinois income tax proposals here, or all of our Illinois coverage here and here. Follow Liz on Twitter @elizabeth_malm.
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