Illinois Officials Reportedly Agree to Modest Tax Package That Does Not Revisit Sharp Tax Increases

In January, Illinois legislators approved raising their individual income tax rate from 3% to 5%, and raised the corporate income tax rate from 7.3% to 9.5%, retroactive to January 1. (Some state officials mislead reporters by stating that their corporate tax went from 4.8% to 7.0%, by not including a separate 2.5% tax on corporate income.) While the proposal was under debate, we noted that the increase would result in Illinois having one of the highest corporate income taxes in the industrialized world, and would hurt their score in our annual State Business Tax Climate Index.

Over this summer, my colleague Mark Robyn testified to Illinois officials, urging them to reconsider the tax increases and focus instead on building a good business climate and get a handle on their spending. Legislators seemed receptive, as Gov. Pat Quinn’s (D) approach of offering targeted incentive packages to specific businesses is unlikely to make up for the high taxes, higher spending, and accumulating debts.

Yesterday, Quinn and legislative leaders agreed to a package that mostly nibbles around the edges:

• “Decouple” from federal bonus depreciation retroactive to January 1, 2011, thereby increasing the difference between federal business income and state business income. This is an accounting gimmick that allows Illinois to once again postpone the day of reckoning, as it does not increase revenue but rather shifts it from the future into the present. Raises $570 million.
• Extend the Research & Development credit by five years, effective January 1, 2011. Approve new targeted incentive packages for the Chicago Mercantile Exchange and Sears.
• Reinstate the net operating loss provision, effective January 1, 2012.
• Reduce LLC filing fees from $750 to $100, effective January 1, 2012.
• Increase the estate tax deduction from $2 million in 2011 to $3.5 million in 2012 to $5 million in 2013.
• Increase the Earned Income Tax Credit (EITC) from 5% in 2011 to 10% in 2012 and 15% in 2013.
• Inflation-adjust the personal exemption.

The Illinois Policy Institute has this chart showing job growth in the state before and after the tax increases were approved:

More on Illinois here.