Illinois’s “Business-Friendliness” Ranking Would Decline Sharply Under Governor’s Plan

March 18, 2009

News Release

According to new analysis, a tax proposal from Illinois Governor Pat Quinn (D) would sharply reduce the ranking of the state’s business tax climate, moving it from the top half to the bottom half in the nation when it comes to “business-friendliness.”

Quinn’s plan would raise the personal income tax rate from 3 percent to 4.5 percent and the corporate income tax rate from 7.3 percent to 9.7 percent. The plan would also increase the personal exemption on the individual income tax from $2,000 to $6,000. A single person with income over $14,000 would face a tax increase under the plan; a married couple with two dependent children would face a tax increase if family income exceeds $56,000.

“Illinois has high property taxes and high sales taxes,” said Tax Foundation staff economist Josh Barro. “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.”

Barro, author of the 2009 State Business Tax Climate Index (a study that measures how well a state’s tax system encourages investment by maintaining a broad tax base and low rates), analyzed the tax proposal’s effects on Illinois’ business tax climate ranking. Based on current tax law, Illinois ranked 23rd out of 50 states for business-friendliness of its tax code. With Quinn’s plan in effect, Illinois’ ranking would have sunk to 31st.

The Index ranks states based on the taxes that matter most to businesses and business investment: corporate tax, individual income tax, sales tax, unemployment insurance tax and property tax. On the sales, unemployment insurance and property taxes, Illinois currently ranks 39th, 43rd and 41st in the nation, respectively. Under Quinn’s proposal, the state would move from 10th to 13th on the personal income tax index, and from 28th to 40th on the corporate income tax index.

Barro also highlighted the effects of a sharp increase in the corporate income tax rate. Currently, Illinois imposes a 4.8% corporate income tax, plus a 2.5% “replacement tax” also levied on corporate income. Quinn’s plan would raise the 4.8% rate to 7.2%, while retaining the replacement tax, for a total rate of 9.7%.

“Illinois would have the fourth highest state corporate income tax rate in the nation under Gov. Quinn’s plan,” says Barro. “Corporate tax burdens are ultimately borne by individuals, as businesses pass these costs onto their employees, customers and shareholders. This plan would raise the cost of doing business and creating jobs in Illinois.”

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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To schedule an interview, please contact Matt Moon, the Tax Foundation’s Manager of Media Relations, at (202) 464-5102.


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