Download Fiscal Fact 255: Illinois Considers Sharp Income Tax Increase, Highest Corporate Tax Rate
For an update to this report, see “Illinois Approves Sharp Income Tax Increase, Third-Highest Corporate Tax Rate.”
Fiscal Fact No. 255
Plan Would Raise Individual Income and Corporate Income Taxes
On January 6, Illinois Senate President John Cullerton (D) announced a legislative deal to raise individual income, corporate income, and cigarette excise taxes.[1] The 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. increases are projected to raise approximately $7.5 billion per year, and be coupled with $12 billion in additional borrowing. Illinois has accumulated billions of dollars in unpaid bills and officials have made little progress compared to other states in producing a structurally balanced budget.[2]
Under the plan, Illinois’s one-rate 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. will rise from 3% to 5.25%, a 75 percent increase. 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. will rise from 7.3%[3] to 10.9%, a 49 percent increase and becoming the highest state corporate income tax in the United States and the highest combined national-local corporate income tax in the industrialized world.[4] The cigarette excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. would rise from 98 cents to $1.98 per 20-cigarette pack.
The income tax increase would be retroactive to January 1, 2011. After four years, the individual income tax will decrease to 3.25%. The plan also includes a $325 annual check to property owners, instead of the current property tax deductionA tax deduction allows taxpayers to subtract certain deductible expenses and other items to reduce how much of their income is taxed, which reduces how much tax they owe. For individuals, some deductions are available to all taxpayers, while others are reserved only for taxpayers who itemize. For businesses, most business expenses are fully and immediately deductible in the year they occur, but others, particularly for capital investment and research and development (R&D), must be deducted over time. .
Plan Would Drop Illinois’s Rank on the State Business Tax Climate Index
Our 2011 State Business Tax Climate Index ranked Illinois 23rd in the country, middle-of-the-pack compared with its immediate neighbors.[5] Illinois’s low, one-rate individual income tax offers the advantages of simplicity, stability, and a competitive rate relative to other states, outweighing more negative elements of the state’s tax system. (See Table 1.)
Table 1: Illinois and Neighbors’ State Business Tax Climate Index Ranks
|
State |
2011 Index Overall Rank |
2011 Individual Income Tax Sub-Index Rank |
2011 Corporate Income Tax Sub-Index Rank |
|
Illinois |
23rd |
9th |
27th |
|
Indiana |
10th |
11th |
21st |
|
Iowa |
45th |
42nd |
47th |
|
Kentucky |
19th |
32nd |
42nd |
|
Minnesota |
43rd |
38th |
44th |
|
Missouri |
16th |
25th |
5th |
|
Wisconsin |
40th |
43rd |
29th |
Source: Tax Foundation 2011 State Business Tax Climate Index.
If the plan announced on January 6 had been in place on July 1, 2010 (the snapshot date for the 2011 State Business Tax Climate Index), Illinois would have ranked 35th instead of 23rd. This is a fall of twelve places, past South Carolina, Georgia, Pennsylvania, Tennessee, Alabama, Nebraska, Oklahoma, Maine, Massachusetts, New Mexico, and Arizona.
On the individual income tax sub-index, Illinois would have ranked 15th instead of 9th, a drop of six places. On the corporate income tax sub-index, Illinois would have ranked 46th instead of 27th, a drop of 19 places. (See Table 2.)
Table 2: Illinois and Neighbors’ State Business Tax Climate Index Ranks with Changes
|
State |
2011 Index Overall Rank |
2011 Individual Income Tax Sub-Index Rank |
2011 Corporate Income Tax Sub-Index Rank |
|
Illinois |
35th |
15th |
46th |
|
Indiana |
10th |
10th |
21st |
|
Iowa |
45th |
42nd |
47th |
|
Kentucky |
19th |
32nd |
41st |
|
Minnesota |
43rd |
38th |
43rd |
|
Missouri |
16th |
25th |
5th |
|
Wisconsin |
40th |
43rd |
28th |
Source: Tax Foundation.
Conclusion
The plan would severely impact Illinois’s attractiveness to business and individuals. The state’s individual income tax, in particular, is one of the best features of Illinois’s tax system. The state is on borrowed time with respect to its budget, but the steps to resolve it should include meaningful prioritization of public services. Officials should avoid short-term solutions that do not fix the ongoing structural budget gap, particularly if the changes have great potential for undermining Illinois’s ability to attract and cultivate business activity as the economy recovers.
Joseph Henchman is Tax Counsel & Director of State Projects at the Tax Foundation. Kail Padgitt, Ph.D. is Staff Economist at the Tax Foundation.
[1] See Benjamin Yount, “Top Dems: Deal on Illinois Tax Hike,” Illinois Statehouse News (Jan. 6, 2011), http://illinois.statehousenewsonline.com/4847/top-dems-deal-on-illinois-tax-hike; Ray Long & Monique Garica, “Democrat Lawmakers Push 75% State Income Tax Increase,” Chicago Tribune (Jan. 6, 2011), http://www.chicagotribune.com/news/local/ct-met-illinois-tax-hike-0107-20110107,0,5933761.story.
[2] See Joseph Henchman, “60 Minutes on State Budget Woes,” Tax Foundation Tax Policy Blog (Dec. 21, 2010), http://www.taxfoundation.org/legacy/show/26917.html; Joseph Henchman, “Illinois Governor Quinn Proposes Income Tax Increase, Borrowing, Not Paying Bills,” Tax Foundation Tax Policy Blog (Mar. 10, 2010), http://www.taxfoundation.org/legacy/show/25963.html.
[3] Some news reports have indicated that Illinois’s corporate income tax is currently 4.8%. This does not include a 2.5% property replacement tax imposed on corporate income. Reference sources that cite Illinois’s corporate income tax, including the Tax Foundation and the Illinois Department of Revenue, report it as 7.3%, including this tax.
[4] See, e.g., Tax Foundation, “Comparing U.S. State Corporate Taxes to the OECD, 2009,” http://www.taxfoundation.org/legacy/show/23034.html. Illinois’s new top rate would exceed Pennsylvania’s, the current highest combined national-local rate.
[5] Kail Padgitt, “2011 State Business Tax Climate Index,” Tax Foundation (Oct. 2010), http://www.taxfoundation.org/legacy/show/22658.html.
Share this article