Policy Documents

Research & Commentary: Illinois Corporate Income Tax Reform

February 13, 2014

Illinois’ combined federal and state corporate income tax rate is 41.2 percent, fourth-highest in the United States and the industrialized world. After a 47 percent increase to the base rate in 2011, Illinois’ state corporate income tax rate of 9.5 percent went from the 21st highest overall corporate tax rate in the country at 4.8 percent to the 4th highest rate, according to the nonpartisan Tax Foundation.

Illinois’ corporate income tax consists of two levies. The first is the base corporate income tax, which currently sits at 7 percent. The second tax, known as the corporate personal property replacement tax, was created by a constitutional amendment in 1980 and adds 2.5 percent to Illinois businesses’ tax bills.

The base corporate income tax is scheduled to automatically decrease from 7 percent to 5.25 percent in January 2015. In February, House Speaker Michael Madigan proposed to cut the corporate income tax to 3.5 percent, below the 2011 level. A press release from Madigan’s office stated the tax cut would save Illinois businesses $500 million to $700 million in Fiscal Year 2014 and up to $1.5 billion in Fiscal Year 2015.

Illinois’ corporate income tax rate of 9.5 percent is higher than those of many of its neighbors –only Minnesota and Iowa have higher corporate tax rates. This puts Illinois at a competitive disadvantage and makes it more difficult for the state to attract new or expanding businesses. Combined with the personal property replacement tax, which would remain at 2.5 percent, the total corporate income tax rate under Madigan’s plan would be 6 percent, which is close to the national average.

Personal and corporate income taxes are generally considered the most destructive taxes because economic growth arises from production, innovation, and risk-taking, which are stunted when government takes dollars out of the hands of businesses and individuals through these levies.

Recent studies show states with no income tax or with lower income taxes perform better economically and achieve greater job and population growth than those with higher taxes. Speaker Madigan’s corporate income tax cuts would be a step in the right direction, but lawmakers could go even further. Lowering income taxes dramatically improves a state’s economy while generating new jobs. The ideal reform for state corporate income taxes would be to eliminate them altogether. Short of that, legislators should strive for a tax system that is not progressive, with as few tax brackets as possible.

The following articles examine income tax reform from multiple perspectives.


Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. These range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Policy Tip Sheet: Corporate Income Taxes
http://heartland.org/policy-documents/policy-tip-sheet-corporate-income-taxes
In this Policy Tip Sheet, Taylor Smith examines corporate income taxes and their effects on economic development. Smith suggests how legislators can limit or eliminate their corporate taxes. 

Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
High personal and corporate income taxes suppress economic expansion, discouraging new businesses and high-income earners from moving into a new market while encouraging current businesses to leave. High taxes also discourage new capital from coming to a state. In this Policy Tip Sheet, Matthew Glans examines the effects of personal and corporate income taxes and suggests how states can improve their income tax systems. 

Madigan Proposes Cutting Business Income Tax in Half
http://articles.chicagotribune.com/2014-01-30/news/chi-madigan-proposes-cutting-business-income-tax-in-half-20140130_1_tax-incentives-income-state-address
Ray Long, Alejandra Cancino, and Rick Pearson of the Chicago Tribune discuss Illinois House Speaker Michael Madigan’s proposal to cut in half Illinois’ state income tax on corporations. 

Illinois Considers Corporate Tax Cut
http://taxfoundation.org/blog/illinois-considers-corporate-tax-cut
In this article, Lyman Stone of the Tax Foundation examines Madigan’s corporate income tax proposal. While Stone is in favor of reducing the corporate income tax, he cautions against additional proposals that would move state to a progressive tax system. 

Illinois’ High Tax Problem
http://heartland.org/policy-documents/illinois-high-tax-problem
Ted Dabrowski of the Illinois Policy Institute examines the 2011 income tax hikes, their effects, and the possibility these disruptive taxes could become permanent. 

Illinois Approves Sharp Income Tax Increase, Fourth-Highest Corporate Tax Rate
http://heartland.org/policy-documents/illinois-approves-sharp-income-tax-increase-fourth-highest-corporate-tax-rate
Kail Padgitt and Joseph Henchman of the Tax Foundation discuss Illinois’ recent income tax increases and argue they will severely reduce the state’s attractiveness to businesses and individuals. Padgitt and Henchman note the increases are a recent phenomenon; up until recently the state’s individual income tax was one of the best features of Illinois’ tax system, helping mitigate a high sales tax and burdensome property taxes. 

Illinois Its Own Worst Enemy for Entrepreneurs
http://news.heartland.org/newspaper-article/2013/12/17/illinois-its-own-worst-enemy-entrepreneurs
Scott Reeder of the Illinois Policy Institute highlights several government policies that have made Illinois a poor place for entrepreneurs, including its high corporate income taxes. 

The Potential Effect of Eliminating the State Corporate Income Tax on Economic Activity
http://heartland.org/policy-documents/potential-effect-eliminating-state-corporate-income-tax-economic-activity
Laura Wheeler, senior researcher at the Fiscal Research Center (FRC) of the Andrew Young School of Policy Studies, summarizes some of the better studies on the effect of state corporate income tax changes on economic activity. Wheeler then uses the results of those studies to estimate the economic effect of eliminating a state’s corporate income tax. She concludes low state corporate income taxes spur investment and employment in the state. 

Personalizing the Corporate Income Tax
http://heartland.org/policy-documents/personalizing-corporate-income-tax
Gerald Prante and Scott Hodge discuss in this Fiscal Fact article the effect of corporate income taxes on individual households. “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced,” they write. 

Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”  

State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth-0
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. They use regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004. The analysis reveals higher marginal tax rates inflict significant damage on economic growth. 

Taxes Really Do Matter: Look at the States
http://heartland.org/policy-documents/taxes-really-do-matter-look-states
Economists Arthur Laffer and Stephen Moore examine the claim tax rates don’t matter and thus raising income taxes, dividend taxes, and capital gains taxes won’t hurt the economy. Analyzing evidence of more than two decades, with data dating back to 1960, the authors find that in any 10-year period, states without an income tax consistently outperformed those with the highest income taxes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other tax topics, visit The Heartland Institute’s Web site at http://www.heartland.org, Budget & Tax News at http://news.heartland.org/fiscal, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.