March 11, 2010
Illinois Income Tax Increase Would Hurt Best Feature of State Tax System
Expanding Sales Tax Base, Eliminating Targeted Business Tax Breaks a Better Solution, According to Tax Foundation Report
Washington, DC, March 11, 2010 -- Illinois Gov. Pat Quinn yesterday called for a 33% increase in the state's individual income tax rate, but a new Tax Foundation report cautions against damaging one of the only good features of the state's tax system. Instead of raising the income tax rate from 3% to 4%, lawmakers should broaden the sales tax base and end targeted business incentives while lowering statutory rates.
"Illinois shouldn't rely on taxes alone to bring the state out of the red, but a change in tax policy could help its economy," said Tax Foundation State Analyst Justin Higginbottom, who wrote the report. "Increasing taxes would worsen the state's already harsh business tax climate and make the state less attractive to the businesses and individuals it should be courting."
Tax Foundation Fiscal Fact, No. 216, "Illinois Should Respond to Recession by Broadening Tax Bases and Spending Frugally, Not by Raising the Personal Income Tax Rate," is available online at http://www.taxfoundation.org/publications/show/25979.html.
Illinois ranks 30th out of 50 (where 1 is the best) in the Tax Foundation's 2010 State Business Tax Climate Index, which measures each state's "tax-friendliness" toward business. The state scores worse than three neighbors (Indiana is 12th, Missouri is 16th and Kentucky ranks 25th), while two neighboring states score in the bottom 10 (Wisconsin is 42nd and Iowa is 46th).
Illinois's state-local tax burden of 9.3 percent (the percentage of their income that Illinois residents pay in state and local taxes) ranks slightly below the national average of 9.7 percent. Illinois' neighbors have similar burdens, except Wisconsin, which has the 10th highest burden nationally at 10.2 percent.
The state's property taxes on homeowners are 6th highest in the country as a percentage of median home value - higher than all neighboring states except Wisconsin. Illinois's combined state and average local sales tax rate of 8.4% is higher than all of its neighboring states and 6th highest in the country (the total rate is higher in some localities, such as Chicago where state, county and city taxes total 10%).
Illinois's corporate income tax rate of 7.3% (the state corporate income tax of 4.8% plus the personal property replacement tax of 2.5%) is comparatively high nationwide, but three of the state's neighbors have even higher rates (Iowa's is 12%, Indiana's is 8.5% and Wisconsin's is 7.9%) while two have lower rates (Missouri's is 6.25% and Kentucky's is 6%).
The best feature of Illinois's tax system is its flat personal income tax rate of 3% (the lowest flat rate in the country). A flat rate with few deductions and credits stabilizes revenue flows from year to year, and minimizes distortionary decision-making by individuals and businesses.
The report notes that one way to improve the state's tax system is to expand the sales tax base to include all end-user goods and services. The state chose to forego over $1.4 billion in tax revenue in 2008 by exempting groceries, drugs and medical appliances from the state sales tax. Another suggestion is to end targeted business incentives such as film tax credits and tax breaks for the bio-fuel industry.
"With these changes, Illinois can create a stable revenue base for the future and concentrate on making the state attractive to businesses and residents."
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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