KOLBER: Illinois’ 120% income tax increase
I know what you're thinking what 120% tax increase could you be talking about? Well let's take a look at what happened in 2017.
The first thing was that our elected officials in Springfield raised the state income tax from 3.75% to 4.95%. That increase is characterized as a 32% increase in state income taxes but that was before the December Tax Cut and Jobs Act (TCJA). This Federal TCJA did two critical things. The first was the reduction in the C corporate income tax (CIT) rate from 35% to 21%. This momentous change was very important for the country and Illinois. America prior to that change had one of the highest corporate tax rates among all nations including our major trading relationships. It was so high that Illinois’ largest Fortune 500 companies, Walgreens with over $100 billion a year in revenue, merged with Boots Alliance, a Switzerland based drug retailer. Walgreens determined that it would be better have a foreign owner to save taxes and make itself more competitive. Such sell outs to foreign owners are referred to as “Inversions”. And what happens after Inversions is that the new owners, such as Boots, will often move central office functions including jobs to their location.
Thankfully this major CIT reduction has put American companies like Walgreens and many of the Fortune 500 companies that are still in Illinois in a better situation where they will no longer seek to sell out and leave Illinois and America. The new 21% CIT makes it far less likely we will lose employers to countries with lower tax rates jurisdictions such as Switzerland where comparative corporate rates can be as low as 11.5%. While Illinois benefited from this C corporate rate reduction provision of the Federal TCJA, Illinois did not gain any competitive advantage over other states. In fact the opposite happened. Perhaps you agree that having a level playing field is a good thing in public policy when it comes to encouraging competition among businesses. And we can agree the 21% CIT has accomplished that for employees of American companies who compete globally as so many do.
So if we agree that a level playing field among employers is a good thing, do we agree it is a good thing among states who compete for employers? Let us look at the second critical change in the TCJA. It was the elimination of the state and local tax deductions or (SALT) for such taxes paid above $10,000 per taxpayer. This change enabled Congress to both raise some revenue to pay for the lower CIT rate to 21% and to level the playing field among states. States with low SALT prior to the change such as Florida, Texas and Tennessee were indirectly subsidizing high SALT states such as Illinois, New Jersey and California. It turned out that Illinois benefited from an un-level playing field and it does no longer. Remember that there is a significant group of employers in Illinois who are taxed as pass-through entities. Individuals in the highest tax bracket, are often employers which can produce substantial revenue for Illinois state government. These individuals and business owners therefore received a double whammy both from the Springfield increase in the state income tax rate last year and from Washington DC with respect to the elimination of the SALT deduction above $10,000.
So here is what happened. Prior to the Illinois tax increase last year and the Federal TCJA’s SALT deduction elimination, Illinois taxpayers paid the 3.75% Illinois rate but they were able to save 1.5% approximately in Federal taxes because the 3.75% was deductible on the Federal return. When you subtract the 1.5% savings due to the SALT deduction, the net Illinois income real cost was 2.25%. Now let's look at the world in 2018 to digest the impact of both the Springfield income tax increase to 4.95% and the elimination at the Federal level of the SALT deduction. The same tax payer now incurs the full 4.95% charge as there is no longer the SALT deduction on the Federal income tax return. So in one year that same taxpayer has gone from 2.25% to 4.95% a 120% increase in taxes emanating from their status as a filer in Illinois.
This unfortunate outcome for Illinois occurs at an awkward moment after Illinois has already seen taxpayers exiting this state at the rate of 60 to 80 thousand for over a decade. Illinois will lose at least one Congressional District in the 2020 census remap as districts have averaged over 700,000 residents.
One candidate for governor is proposing a progressive income tax would raise the rate to as high as 7.75%. This would amount to a tax increase of over 300% form where we were just last year. Even without implementation of this inconsiderate progressive income tax proposal, we can expect the rate of taxpayer exodus from Illinois to grow significantly due to the now in effect 120% increase. The proposed progressive rate could cause the Illinois diaspora to grow at an accelerating rate beyond the unacceptable exodus which is already in process. There are other compelling arguments against a further tax increase for Illinois particularly the progressive income tax which will serve as a chokehold on growth if not lead to economic shrinkage or recession. But the mere stopping of progressive income tax rate emanating from Springfield would at least prevent a further increase in the hemorrhaging of Illinois tax payer’s flight to other states who are seeking to grow.
Chairman & Founder
May 23, 2018