Graduated Income Tax Amendment Fails

Date: May 17, 2016 Last Edit: May 18, 2016

Bipartisan opposition efforts helped kill proposal.

Graduated Income Tax Amendment Fails

Lucky for Illinois small business owners, time
ran out on the effort to replace the state’s flat-rate income tax with a
progressive one. If it had passed, Illinois would have imposed the
second-highest state tax rate on pass-through businesses in the nation: 11.25
percent. 

Furthermore, in eliminating one of the best
elements of the state’s tax code—its flat rate of 3.75 percent—Illinois would
have plummeted in competitiveness. According to the Tax Foundation, the Prairie
State would have fallen from 23rd to 48th in the nation in their annual State Business Tax Climate index.
Meanwhile, the Tax Foundation notes, four of Illinois’ six neighboring states
have top tax rates of 6 percent or less. Iowa also allows a deduction for
federal taxes paid.

The Illinois Department of Revenue’s fiscal note
also outlined the staggering impact of the proposal: 20,000 lost jobs,
outmigration of more than 43,000 people, and a $1.9 billion GDP loss.

Under the legislation (HB 689/SB 518), Illinois’
current single-rate individual income tax would have been changed to a
four-bracket tax ranging from 3.5 percent to 9.75 percent.  However,
amending the state constitution to authorize a graduated-rate income tax rate
would open the door to higher rates and alternative brackets in the future. The
rates/brackets proposed were:

 For
single filers:

  • 3.5 percent on income up to
    $100,000
  • 3.75 percent on income
    between $100,000 and $500,000
  • 8.75 percent on income
    between $500,000 and $1 million
  • 9.75 percent on income
    higher than $1 million

 For joint
filers:

  • 3.5 percent on income up to
    $200,000
  • 3.75 percent on income
    between $200,000 and $750,000
  • 8.75 percent on income
    between $750,000 and $1.5 million
  • 9.75 percent on income
    higher than $1.5 million

Because most small business owners file their taxes
as pass-through entities—in which their business income is taxed as personal
income—this significant spike in tax rates would have been a huge hit.
Additionally, since pass-through businesses must also pay a 1.5 percent
personal property replacement tax, the new top income tax rate would have
surged to 11.25 percent. According to the Tax Foundation, this rate is second
only to California in highest state rates on small businesses in the nation,
and it is also significantly higher than the rate paid by traditional C
corporations (7.75 percent).

For the Tax Foundation’s full analysis of the
tax, visit http://taxfoundation.org/article/illinois-considers-1125-percent-tax-small-businesses

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