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 COVID-19 and state-mandated restrictions already damaged
Illinois small businesses, but the extra challenge of a 50.3% marginal income
tax rate awaits if Gov. J.B. Pritzker’s “fair tax” is added to their state and
federal income tax burdens.
Despite wide-spread agreement that you should not raise taxes during an economic
downturn, Pritzker insists Illinois needs his $3 billion income tax hike now
more than ever. But massive job losses and stubbornly high unemployment rates
mean there might not be a worse time for a tax hike. Hiking taxes during a
recession, or just as the economy attempts to get back on its feet, would be a
clear policy mistake. One reason is the income tax hike would hit the state’s
largest job creators – small businesses – the hardest.
Small businesses are responsible for 60% of the net job creation in Illinois and
are the businesses most at risk from the economic fallout of COVID-19. Changing
to a progressive income tax in Illinois could mean a massive tax hike for these
businesses and create marginal income tax rates in excess of 50% when all state
and federal income taxes are included. Research has shown an increase in the top
marginal tax rate is associated with a decrease in hiring activity of
entrepreneurs and lower wages for their employees.
When considering all of the layers of income taxes Illinoisans face, small
businesses – who pay taxes as individuals – could be left paying 50.3% of their
top-end income in taxes. Total marginal income tax rates would range from 31.6%
to 50.3% thanks to federal income tax, Social Security tax, Medicare tax, state
income tax, and Illinois’ Personal Property Replacement Tax.
The increase in the state income tax from the current flat rate of 4.95%, to up
to 7.99% under the progressive income tax, would mean that some small businesses
would face a state income tax hike 5 times larger than big businesses.
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While the total corporate income tax rate – including the Personal Property
Replacement Tax – will be hiked by 10% (from 9.5% to 10.49% when including the
replacement tax), the tax hike for pass-throughs could be up to 47% (6.45% to
9.49% when including the replacement tax).
Research from April showed fewer than half of all U.S. small businesses expected
to re-open this year if the crisis lasted more than four months. For the small
businesses that do manage to survive, the last thing their owners and employees
need is a tax hike to crush them while they’re attempting to get back on their
feet.
Small businesses such as S-corps, partnerships, LLCs, and sole proprietors make
up a large majority of business establishments in Illinois, representing 71% of
all private for-profit businesses, totaling more than 210,000 establishments.
These small businesses also employed nearly half of Illinois’ private for-profit
workforce prior to the COVID-19 downturn, or more than 2.3 million Illinoisans.
Contrary to the governor’s claims, a progressive income tax hike is the exact
opposite of what Illinois lawmakers should be doing in the midst of the COVID-19
crisis.
Nearly 700,000 Illinoisans remain out of work as a result of the pandemic. That
is after the first year on record in which Illinois lost private-sector jobs
amid a national boom.
Imposing marginal tax rates exceeding 50% for Illinois’ largest job creators
during the current economic crisis would be a painful mistake.
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