 Illinois’ unemployment rate hovers above national and regional
averages, and its out-migration rate surpasses that of every state in the
region. Record amounts of income-earning power have left the state in the last
five years. Yet lawmakers in Springfield have proposed a slew of new taxes and
tax hikes in the first three months of 2017, which would encourage even more
employers and residents to flee the state.
House Bill 3393, a “privilege tax” proposal from state Rep. Emanuel Chris Welch,
D-Hillside, would hit partnerships and S corporations engaged in investment
management services with a 20 percent tax on fees earned from their investment
strategies.
The measure is intended to compensate for a federal provision that taxes carried
interest earned by investment firms at the capital gains rate, rather than at
the higher ordinary income rate. HB 3393 provides that the Illinois privilege
tax would cease if Congress passes and the president signs a comparable bill
changing federal tax law.
HB 3393 would take effect in July, and proponents estimate the privilege tax
would bring in $473 million in revenue. The measure passed out of the House
Revenue and Finance Committee March 23 on a party-line vote, with seven
Democrats voting in favor and four Republicans voting no. The bill now heads for
a hearing by the full House.
Groups such as the Chicago Teachers Union have demonized those in the financial
sector for their “outsized fund earnings” and have long backed plans to force
investment managers and “the rich” to pay their “fair share” of taxes.
In their zeal to get investment managers to pay up, the backers of HB 3393 would
drive financial firms, many of which are highly mobile, out of the state. Many
firms in Illinois’ venture capital industry, which provides financing for the
tech sector among other job creators, would head for the exits rather than pay
the new tax, according to Wirepoints Illinois News.
And while HB 3393’s sponsors have portrayed the bill as taking aim at wealthy
hedge fund managers and private equity partners, the bill has broad wording and
could reach small-shop retirement investment advisers, according to Taxpayers’
Federation of Illinois President Carol Portman in a statement to Illinois News
Network. These advisers would likely pass the tax’s costs down to customers.
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 While Senate Bill 1719, a similar measure in the
Illinois Senate, provides that the tax would take effect only when
comparable legislation passes in New York, New Jersey and
Connecticut, HB 3393 contains no such language. If HB 3393 were to
become law, Illinois would stand alone among states with large
financial sectors in imposing this tax on investment managers’ fees.
And even if those states also imposed new taxes on investment
managers, those states are not just competing with each other.
Illinois competes for jobs with Florida and Texas – and London and
Hong Kong – as well as with New York, New Jersey and Connecticut.
The poorly thought-out nature of the bill is further reflected in
the fact that it fails to account for what’s known as apportionment.
That means the Prairie State would tax income that is already
properly taxed by other states, in violation of the U.S.
Constitution. As the bill imposes an additional tax on fees earned
by investment managers, it may also violate the Illinois
Constitution’s income tax provision, which states that “[a]t any one
time there may be no more than one such tax imposed by the State for
State purposes on individuals and one such tax so imposed on
corporations.” The bill would almost certainly face legal challenges
if enacted.
Rather than seeking to punish successful firms and business people,
Illinois policymakers should focus on structural changes to increase
the state’s competitiveness and make it hospitable to job creators.
Instead of calling for “soak the rich” taxes that would be
self-defeating in driving economic activity and taxpayers out of the
state, lawmakers should address the state’s out-of-control pension
and retiree health care liabilities and government worker costs that
drive incessant demands for more revenue.
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