 Entrepreneurship is the embodiment of the American Dream, and through their
creativity and hard work, entrepreneurs bring new ideas, products and ways of
doing things to the marketplace, often building businesses generating
significant numbers of jobs. Fostering entrepreneurship is especially important
for Illinois, which has experienced lackluster jobs growth and an unemployment
rate that surpasses those of its neighbors. Yet, Illinois punishes, rather than
encourages, entrepreneurs through its corporate franchise tax, death tax and
limited liability company, or LLC, startup filing fees.
Lawmakers should repeal these taxes and slash LLC fees to make Illinois a
welcome home for entrepreneurs and the jobs they create.
Eliminate the corporate franchise tax
The corporate franchise tax makes Illinois one of only two states explicitly
taxing “paid-in” capital of new corporations. Mississippi repealed its corporate
franchise tax this year, meaning it’s now only Illinois and Alabama that tax the
paid-in capital of entrepreneurs. This tax harms entrepreneurship in several
ways:
The cost of compliance is high relative to the revenue raised. Compliance might
even cost the economy more in lost productivity than the tax raises in revenue.
The tax is far more burdensome for smaller businesses and start-ups than it is
for established corporations.
It taxes investments in Illinois in a perverse way, which drives away
job-creating investments.
The tax is extremely outdated and makes Illinois appear slow to adapt public
policy to the modern economy – which is not a good image for a state seeking to
attract innovators and new businesses.
The Illinois tax code needs to stop punishing entrepreneurs_graphs-01
Repeal the death tax
And Illinois’ estate tax, better known as the “death tax,” also hurts
entrepreneurs and their businesses. The death tax in Illinois takes 16 percent
of the estate of wealthier individuals beyond a certain exemption. It is an
obvious driver of out-migration of wealthy business owners. No Southern state
has a death tax, because they know wealthy retirees don’t want to move to states
with death taxes. The estate tax takes a chunk of a productive working business
assets or a farm and turns it into a one-time cash grab by the government.
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 Not many states maintain an estate tax, and several states have
repealed theirs in the last decade. Reasons to repeal the estate tax
include the following:
It’s an obvious driver of out-migration of wealthier families and
business owners. The tax can easily be avoided by moving businesses
and wealth out of the state.
The tax is unfair to farmers who can’t avoid it, and it breaks up
family farms.
The tax costs Illinois jobs when businesses and business assets
move over the border to avoid it.
It amounts to double taxation because it falls on businesses and
assets that have already been taxed at the income tax level. This is
unfair and creates an excessive drag on the state economy.
Slash LLC fees
Illinois has ridiculously high LLC start-up fees. The high-fee
schedule brings in little revenue for the state, but it puts up a
huge red flag for entrepreneurs. Those who do start an LLC in
Illinois are punished with a $500 fee just to file their papers, and
are hit up for another $250 per year every year after that, simply
to continue filing forms with the state. The combined start-up and
annual filing fee in Illinois is $750, far and away higher than the
same combined-fee schedule in surrounding states. These fees should
be dramatically slashed for several reasons.
Illinois LLC fees are simply anti-poor. It’s easy for a rich
entrepreneur to pay them, but it’s difficult for a poor entrepreneur
to cough up $500 just to file papers.
The ridiculous LLC-fee schedule makes Illinois look especially
unfriendly compared to neighboring states.
A fair fee for filing paperwork should be the cost for the state
of processing that paperwork.
This is one of the easiest changes Illinois can make to foster
entrepreneurship.
Illinois needs to keep the overall tax burden as low as possible
to relieve its already over-burdened families and business
community. In addition, the way Illinois taxes and collects fees
should be fixed, starting with rolling back the parts of the tax
code that punish entrepreneurs. The way to do that is to eliminate
the corporate franchise tax, repeal the death tax and slash LLC
fees.
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