Illinois Considers Corporate Tax Cut

January 31, 2014

Illinois House Speaker Michael Madigan (D), has filed a bill to lower Illinois’ corporate tax rate dramatically. At 9.5 percent, Illinois’ corporate tax is among the highest in the nation. Notably, many sources erroneously report Illinois’ corporate tax rate as 7 percent, excluding the 2.5 percent “personal property replacement tax.” However, as we have explained before, these two taxes should be treated together. While some media outlets have suggested that Illinois’ corporate tax rate will be cut by "half," in reality, the rate would fall from 9.5 percent to 6 percent. That’s a substantial drop, but not quite half.

With the 4th highest corporate tax rate in the nation, and one of the highest in the developed world, Illinois has needed corporate tax reform for a while. Thus, Speaker Madigan’s bill is a step in the right direction. We’ve argued for years that Illinois’ high corporate tax rate motivates mounting calls for tax incentives and special handouts. Indeed, from 2010 to 2011, Illinois’ outlays of EDGE tax credits (the state’s core tax incentive program) doubled to $161.1 million.

Reducing the corporate tax will greatly contribute to Illinois’ competitiveness. Chicago has historically been an appealing site for corporate headquarters for many reasons, including its numerous transportation links by boat, road, rail, and air, as well as its generally good quality of life. Adding a tax climate that is friendly to businesses will only build on those assets.

There is, however, a concern to be raised. As our regular readers know, Illinois is also considering a progressive income tax proposal that would seriously damage the state’s business tax climate. One major cause for concern is that small businesses overwhelmingly file as pass-through entities, which means they are taxed under the individual income tax, not the corporate income tax.

Reducing the corporate tax rate will improve Illinois’ tax climate. However, if Illinois cuts the corporate tax rate in tandem with a sharp spike in the small business tax rate, that won’t help the state’s economy, and it won’t make them much more business-friendly. Big businesses may put some headquarters in Chicago, but entrepreneurial startups and family-owned businesses will struggle, and all businesses may find it more difficult to attract high-skilled workers due to the high taxes on their wages.

In sum, we’re excited to see Illinois considering significant corporate tax reform. But we’re also wary: good corporate tax policy should complement, not replace, good individual income tax policy.

Read more on Illinois here.

See us talking about this proposal in the media here.

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