Illinois Tax Plan Would Sacrifice Its Only Tax Advantage Over Other States

June 24, 2009

As Illinois legislators gather in Springfield for a special session called by Governor Pat Quinn (D), a Tax Foundation expert warned that Quinn’s proposal to increase individual and corporate income taxes would sharply reduce Illinois’s state business tax climate ranking, moving it from the top half to the bottom half in the nation when it comes to “business-friendliness.”

Illinois has high property taxes and high sales taxes. Currently, those taxes are partly offset by a low personal income tax. With a 50% increase in the income tax rate, Illinois legislators would give up the state’s one tax climate advantage.

Quinn’s plan would raise the personal income tax rate from 3% to 4.5% and the corporate income tax rate from 7.3% to 9.7%. The plan would also increase the personal exemption on the individual income tax from $2,000 to $3,000.

Quinn’s proposed new top corporate tax rate would be the fourth highest in the country, behind only Minnesota, Pennsylvania, and the District of Columbia.

The Tax Foundation annually produces a State Business Tax Climate Index, which measures how well a state’s tax system encourages investment by maintaining a broad tax base and low rates. Based on current tax law, Illinois ranked 23rd out of 50 states for business-friendliness at the beginning of this fiscal year. With Quinn’s plan in effect, Illinois’s ranking would have sunk to 31st.

Illinois should also be criticized for claiming that its corporate rate is lower than it actually is. Illinois imposes a 4.8% corporate income tax, plus a 2.5% ‘replacement tax,’ for a total of 7.3%. Quinn’s plan would raise that 4.8% rate to 7.2% while retaining the replacement tax, for a total rate of 9.7%.

Corporate tax burdens are ultimately borne by individuals, as businesses pass these costs onto their employees, customers and shareholders. A growing body of scholarly evidence finds that increasing corporate taxes leads to depressed wages as businesses try to stay competitive. The proposed corporate tax increase would hurt Illinois’s ability to attract investment and create jobs.

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