Many Sources Misreporting Illinois Corporate Tax Rate

January 14, 2011

This week, Illinois raised its corporate income tax from 7.3% to 9.5%. Many media sources have gotten this right, but many (unfortunately including the Associated Press and the Christian Science Monitor) have erroneously reported that the tax changed from a much lower 4.8% to a modest 7.0%. This misreporting comes from counting only one part of the corporate income tax, which officials do because the revenue goes to two different places. (Although I’m sure someone is happy to see the misleading lower rate quoted.)

Illinois has two components to its corporate income tax: one where revenue goes to the general fund, and one that was enacted to phase out another tax (hence the name, “personal property replacement tax”), with revenues going to local governments. They both tax the same thing and experts treat it as one combined tax. (See Illinois Department of Revenue (PDF, line 2), Federation of Tax Administrators (PDF), the Financial Times, BNA, many media sources, and of course, the Tax Foundation.)

That first tax is the 4.8% one that was raised to 7.0%. The second one, the personal property replacement tax, stayed at 2.5%. The combined tax, therefore, went from 7.3% to 9.5%. Stating that Illinois’s corporate income tax was 4.8% and is now 7.0% is to count only part of the tax that the state imposes on corporate income. It also prevents apples-to-apples comparisons with other states’ rates, and has led to overstatements of the size of the increase (45% rather than 30%).

A similar situation exists with California’s income tax, although there the purpose seems to be intentionally hiding the true top income tax rate.

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