A new report ranked Illinois in the bottom third of states when it comes to the state’s business tax climate.
Illinois ranked 35th in the annual State Business Tax Climate Index produced by the Tax Foundation. Jared Walczak, director of state tax policy with the organization, said the index was designed to show how well states structure their tax systems and provide suggestions for improvement.
“Illinois’ tax structure is not the worst amongst states, but it consistently has high taxes and tends to make it relatively difficult to invest and grow capital in the state,” Walczak said. “It does better than states that have a long laundry list of unique taxes that penalize business investment, but it struggles simply because every [tax] is high in the state.”
Walczak said the one redeeming feature of Illinois’ tax code was the existing flat income tax rate. He said the push for a progressive tax could drive the state farther down the rankings.
“It is at a flat rate and a relatively modest rate,” Walczak said, “though it is higher than some think for pass-through businesses. They have a surcharge imposed on top of that tax, so it’s not 4.95-percent for them, it’s 6.45-percent.”
After action by lawmakers earlier this year, Illinois voters will decide in 2020 if the state’s flat-tax structure should be replaced in the state constitution with a progressive income tax, which would levy rates based on income levels.
The state’s ranking was unchanged from the foundation’s last survey, but has fallen from the mid-20s in the past few years.
“Illinois has raised a number of taxes over the past few years,” Walczak said. “In some cases, tax reductions have been allowed to sunset again in response to the ongoing budget challenges and the mound of unpaid bills. And then you’ve seen other states just make competitive leaps.”
Among surrounding states, Indiana ranked 10th, while Wisconsin, Kentucky, and Missouri were all higher on the list than Illinois.
“Indiana has all of the major tax types, but in every case they are broad-based and with low rates,” Walczak said. “They have relatively few carve-outs or special incentives. It’s very simple for compliance. You know what you’re getting and there’s pretty good equality across business types and individuals.”
Walczak said that Illinois also was penalized for being one of the handful of states that still have an estate tax on the books. High property taxes also weighed down the state’s ranking.
“Every state can do better with its structure, but Illinois has a long way to go and needs to look at its peer states that are making their code more competitive,” Walczak said.
Illinois was recently ranked the “least tax-friendly” state in the nation, according to a new report from business and economic forecasting publisher Kiplinger.