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 Illinois Gov. J.B. Pritzker is vocal about the state’s need to
support small businesses. But the members of that community who create the bulk
of the state’s jobs would see a tax hike under a progressive state income tax
plan released by the governor’s office.
On March 7, Pritzker’s administration unveiled proposed graduated rates for his
income tax plan. The state’s current flat tax rate of 4.95 percent would rise to
7.75 percent on income above $250,000 for individuals, and again to 7.85 percent
on income above $500,000. Individuals earning more than $1 million would pay a
7.95 percent effective rate, meaning it would apply to all taxable income.
One of many problems with Pritzker’s tax plan hits at the heart of job creation
in Illinois. That’s because according to IRS data from 2016, a tax hike starting
at $250,000 would affect about one-fourth of small businesses in Illinois that
are taxed as individuals. Small businesses were responsible for creating nearly
two-thirds of Illinois’ jobs in 2017.
 “I am a big proponent of small businesses and having a government that stands
for small businesses,” then-candidate Pritzker said in September 2018, according
to the Northwest Herald. “We need to help people start businesses and grow those
that already exist.”
At a time when Illinois’ private sector jobs growth ranks 46th among the
nation’s 50 states, small businesses are certainly in need of support. But the
rates released by the governor would put many of them under an increased tax
burden in an already-hostile economic climate. These small business owners
suffered back-to-back record income tax hikes in 2011 and 2017. Now many of them
are bracing for a $15 minimum wage hike Pritzker signed into law in February.
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Small businesses constitute the “vast majority” of
businesses nationwide, according the Tax Foundation. As of 2014,
they employed more than half the nation’s workforce.
That’s also true in Illinois: Businesses with fewer than 50
employees created the vast majority of net new jobs in Illinois in
2017, according to data from the U.S. Census Bureau. They accounted
for 62 percent of Illinois jobs growth that year. Small business
corporations have been the primary drivers of Illinois’ recovery
from the Great Recession. They generated 119,000 new jobs in
Illinois between 2010 and 2017.
These small pass-through businesses – which include sole
proprietorships, partnerships and small business corporations known
as “S corporations” – are exempt from paying the corporate income
tax rate. The business owner instead pays both federal and state
income taxes on his or her personal income, making them especially
vulnerable to Pritzker’s progressive tax plan.
Illinois’ hostile tax and business climates have crushed the state’s
labor market, and are the primary reasons Illinoisans are fleeing
across state lines. Placing a heavier tax burden on much of the
state’s small business community is bound to suppress investment in
a state that desperately needs it, or send those who can move
packing.
Rather than shuffling tax rates across income levels, state
lawmakers should pursue reforms that address the root cause of the
state’s addiction to tax hikes.
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