A Tax Compromise Offered in Illinois

Illinois continues to struggle with its budget. The state’s most recent stopgap budget expired on December 31, 2016. To perhaps break up the political logjam, Illinois senators of both political parties have begun negotiations on a compromise plan, which includes tax changes, pension reforms, and expanded gambling operations in the state. While Illinois continues to look for a solution to its budget impasse, this tax plan would make the state’s tax code less competitive.

The plan includes several key tax changes:

• Individual Income Tax Rate: The individual income tax rate would increase from 3.75 percent to 4.95 percent.
• Corporate Income Tax Rate: The corporate income tax rate would go from 5.25 percent to 7.00 percent. The state’s 2.5 percent personal property tax rate would still be applied as well, bringing the total corporate income tax
  rate to 9.5 percent.
• Earned Income Tax Credit: The plan would expand the state’s earned income tax credit from 10 percent of the federal credit to 15 percent.
• Sugar-Sweetened Beverage Tax: The state would also enact a $0.01 per ounce tax on sugar-sweetened beverages.

This proposal, as currently structured, would lower the state’s ranking in our State Business Tax Climate Index. The largest score impact is from the increase in the corporate income tax rate. A total rate of 9.5 percent would give Illinois the fourth highest corporate income tax rate in the country, behind only Iowa, Pennsylvania, and Minnesota, and lowers Illinois’s corporate income tax subcomponent score dramatically. Illinois’s corporate income tax structure would fall into the bottom ten of states.

The Index results, however, do not include the effect of the sugar-sweetened beverage tax. (Sugar-sweetened beverage taxes are not a variable within the Index.) As is seen with the recently-enacted proposal in Philadelphia, soda taxes are not a particularly good way to raise revenue at the state and local level. Cook County (home of Chicago) also just passed a $0.01 per ounce soda tax that will take effect in July. The new proposal would be in addition to Cook County’s tax.

The plan was introduced last week, but it was not voted upon before the end of the General Assembly’s term yesterday. However, supporters plan to reintroduce the package in the next several weeks, and the senate president signaled that he’d like to hold hearings on the matter later this month. We will continue to monitor any process in Illinois closely.

Erratum: An earlier version of this blog post listed the current Illinois corporate tax rank as 36th. It is 26th.