NCPA - National Center for Policy Analysis

Illinois Tax Proposals Would Increase Taxes on Most Employers

April 3, 2014

New tax proposals in Illinois would raise taxes on a majority of employers, say Liz Malm, an economist with the Center for State Tax Policy at the Tax Foundation.

Currently, Illinois has a single 5 percent tax rate on all individual incomes (set to decrease to 3.75 percent in 2015 upon expiration of tax increase legislation), and the Illinois state constitution prohibits the use of a graduated rate individual income tax. But there are three proposed plans in front of the Illinois General Assembly that would amend the constitution and allow for such a graduated rate tax.

  • One plan from Rep. Naomi Jakobsson would institute a top rate of 9 percent on incomes above $500,000.
  • A second plan, from the Center for Tax and Budget Accountability, would put the top rate at 11 percent on incomes above $1 million.
  • House Speaker Michael Madigan's plan would institute a 3 percent surcharge on all taxpayers with incomes over $1 million.

These proposals have serious consequences for Illinois businesses.

  • Sixty-one percent of Illinois employers in 2011 were sole proprietorships, partnerships or S corporations. This is significant because all of these business forms are pass-through entities, meaning that the business itself does not pay corporate income taxes. Instead, the business owners pay taxes on earnings through the individual income tax.
  • Many of these pass-through entities would be subject to tax rate increases as a result of the three tax proposals. This makes it difficult for businesses to grow, hire or retain their workers.

Much of Illinois' workforce is employed at pass-through entities.

  • In 2011, 38 percent of jobs with at least one paid employee were at pass-through entities.
  • The industries that would be hardest-hit by these tax increases are those with the highest share of pass-through employers: the construction industry, the professional, scientific, and technical services industry; the agriculture, forestry, fishing and hunting industry; the administrative and support services industry; and the real estate industry.

Illinois was hit harder by the recession than the rest of the country, and it has only recovered two-thirds of lost employment from that time (the country as a whole, on the other hand, has recovered 85 percent). Transforming the income tax from a flat rate to a graduated system would only hurt Illinois employers and the economy.

Source: Liz Malm, "Moving to a Progressive Income Tax Would Increase Taxes on the Majority of Illinois Employers," Tax Foundation, March 24, 2014.


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