By Jared Walczak | Illinois Policy Institute
Illinois’ tax code stands in the way of the state’s economic competitiveness. The combination of high tax burdens and a poor tax structure contributes to the loss of jobs and investment to other states. From a place of former economic dominance, Illinois now ranks 45th in gross state product (GSP) growth over the past decade and 49th in interstate migration, losing some 943,000 people and nearly $90 billion in adjusted gross income to net outmigration over the past decade. Taxes are not the only reason for Illinois’ challenges, but they are an important contributor.
This research identifies 10 reforms that would enhance the state’s tax competitiveness. Some represent substantial changes while others are comparatively modest, but independently or as a whole they would make Illinois a better place to live, work and start (or grow) a business. They are:
- Eliminating the throwback rule, which raises little revenue but makes it hard for some remaining businesses, especially small manufacturers, to operate in Illinois, because it imposes Illinois’ high tax rates on all income not taxed by another state.
- Providing first-year expensing for machinery and equipment to eliminate the current tax code’s bias against capital outlays and treat these investments like other ordinary business expenses.
- Evaluating economic development incentives, curtailing the least efficient credits and reforming others to yield a better return on investment and free up revenue that could provide broad-based tax relief.
- Decoupling from a tax on international income (NCTI) that distorts the federal-level tax it attempts to copy and increases costs for Illinois businesses and consumers.
- Permanently uncapping net-operating-loss (NOL) deductions to ensure that businesses don’t face effective rates well in excess of the actual statutory tax rate, and to eliminate a particularly egregious penalty on startups.
- Repealing the corporate franchise tax, an antiquated tax that imposes high compliance costs and is levied without regard to ability to pay.
- Modernizing the sales tax base to make the tax fairer and more economically neutral, and to pay for reductions in the tax rate.
- Repealing the estate tax, which drives many high-net-worth households out of the state in the final years of their lives, harming the state’s economy and depriving the state of other tax revenue from them in those years.
- Expanding property tax levy limits, stripping out restrictions that have rendered them largely ineffective and turning these limits into a meaningful tool to rein in property tax burdens.
- Reforming unemployment insurance taxes to better align them with the overall policy goal of reducing unemployment.
Illinois is a high-tax state. That makes it even more important that policymakers get the tax structure right. These reforms, separately or in combination, will make Illinois more competitive, helping the state attract and retain jobs and grow the economy.
The comprehensive solutions piece continues here.
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