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1 Joseph Henchman & Kail Padgitt, Illinois Approves Sharp Income Tax Increase, Fourth-Highest Corporate Tax Rate 1 (2011)

handle is hein.taxfoundation/ffcfgxz0001 and id is 1 raw text is: Januay 12, 2011 No. 256 Illinois Approves Sharp Income Tax Increase, Fourth-Highest Corporate Tax Rate By Joseph Henchman & Kail Padgitt Plan Will Raise Individual Income and Corporate Income Taxes Early on January 12, 2011, the Illinois Legislature narrowly passed a bill that significantly raises individual income and corporate income taxes.1 Under the plan, Illinois's one-rate individual income tax will rise from 3% to 5%, a 67 percent increase. The corporate income tax will rise from 7.3%2 to 9.5%, a 30 percent increase, becoming the fourth-highest state corporate income tax in the United States, and the fourth-highest combined national-local corporate income tax in the industrialized world.3 Two additional provisions include a reinstatement of the estate tax at the 2001 level and a temporary suspension of the net operating losses (NOLs) associated with the corporate tax. The tax increases are projected to raise approximately $6.5 billion per year, and be coupled with additional borrowing. Illinois has accumulated billions of dollars in unpaid bills and officials have made little progress compared to other states in producing a structurally balanced budget.4 The income tax increase will be retroactive to January 1, 2011. After four years, the individual income tax will decrease to 3.75%. Then in 2025, the individual income tax rate will drop to 3.5%. The corporate tax will follow a similar schedule of rate decreases: in four years the rate will be 7.75% and then in 2025 it will go back to the current rate of 7.3%. Plan Drops Illinois's Rank on the State Business Tax Climate Index Our 2011 State Bu s ; 7-wB 'I C fifNate Index ranked Illinois 23rd in the country, middle-of-the-pack compared with its immediate neighbors.5 Illinois's low, one-rate individual income tax offers the advantages of simplicity, Joseph Henchman is Tax Counsel & Director of State Projects at the Tax Foundation. KailPadgitt, Ph.D. is Staff Economist at the Tax Foundation. 1 See Ray Long, Quinn on tax hike: 'Our fiscal house was burning' Chicago Tribune (Jan. 12, 2011) http: /n -cixs l.) g s.chicagotribui.com /cloutst./20 11 /q-unn-n-tax-hike-our-fiscal-house-was-1) ung.html 2 Some news reports have indicated that Illinois's corporate income tax is currently 4.8%. This does not include a 2.5% property replacement tax imposed on corporate income. Reference sources that cite Illinois's corporate income tax, including the Tax Foundation and the Illinois Department of Revenue, report it as 7.3%, including this tax. 3See, eg, Tax Foundation, Comparing U.S. State Corporate Taxes to the OECD, 2009, htt_: /xxxxxxvtaxfoundationor/tadaa siw23034.htmnl. Illinois's new top rate would be exceeded only by Pennsylvania (9.990%), Minnesota (9.80%), and Iowa. Iowa has a 120% top rate but its effective rate is lower after accounting for federal deductibility. 4 See Joseph Henchman, 60 Minutes on State Budget Woes, Tax Foundation Tax Po/i@ Blog (Dec. 21, 2010), ht_:/! vtxomaino ~ soi61.tl Joseph Henchman, Illinois Governor Quinn Proposes Income Tax Increase, Borrowing, Not Paying Bills, Tax Foundation Tax Po/i@ Blog (Mar. 10, 2010), htt v //wwwxtaxfounldationl or /blo /shovv 2963. html. 5Kail Padgitt, 2011 State Business Tax Climate Index, Tax Foundation (Oct. 2010), htt_: /xxx !vvvtaxfoundationor nev ' ox22658.html.