Illinois Should Keep the Good Part of Its Tax System

The Illinois Comptroller is calling for a progressive income tax in the state. Right now the state has a flat income tax equal to 3% of adjusted gross income. Some people say this is fair, some say it isn’t. We would note that Illinois has an earned income tax credit that makes the state’s system at least somewhat progressive. And if progressivity is really the issue, why not lower the rates for low income taxpayers and cut some of those distortionary incentives like film tax credits, business and economic development credits, and R&D credits? This would eliminate costly and unjustifiable tax expenditures while allowing the state to keep its income tax rate low.

Illinois’ income tax is one of the few good things about the state’s tax system. In our 2009 State Business Tax Climate Index Illinois ranked 23rd overall, right in the middle. But in the subcategories the only good score that Illinois received was for its personal income tax. It ranked worse than average for corporate income taxes and rather poorly in property taxes, sales taxes, and unemployment insurance taxes.

It would be a bad move for Illinois policy makers to increase the only tax they have that even keeps them looking mediocre nationally. The state should be striving to be an attractive destination for business (many of which file under the personal income tax code) and entrepreneurs, not a place that high income individuals will try to avoid.

The Governor says that any income tax increase will likely have to wait until February.