Illinois Considers Sharp Income Tax Increase, Highest Corporate Tax Rate

January 7, 2011

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 tax 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 tax will rise from 3% to 5.25%, a 75 percent increase. The corporate 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 tax 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 deduction.

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.


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