Illinois’ high corporate tax rate hurts jobs when businesses need COVID-19 help

A new ranking puts Illinois’ corporate tax rates near the top. Still, Gov. J.B. Pritzker wants to extract $900 million more from corporations after failing to stop up to $1 billion in COVID-19 tax credits for small businesses.

Illinois’ corporate tax rate is among the six highest in the U.S., but the more problematic measure may be that it far outpaces most neighboring states, according to a new Tax Foundation survey.

Plus, Gov. J.B. Pritzker is looking for ways to close corporate tax “loopholes.” His fiscal year 2022 budget preview released Feb. 9 called for $900 million from that source. He offered no details.

Pritzker failed during the lame duck legislative session to stop a COVID-19 tax credit worth $500 million to $1 billion to the state’s small businesses. He previously vowed to again go after that tax break during the upcoming legislative session, but offered no explanation Feb. 9 of how his new plan to seek $900 million by closing loopholes would impact that effort.

Indiana’s corporate rate is 5.25% compared to Illinois charging 9.5%, and Indiana plans to drop its rate again to 4.9% on July 1.

Iowa is the only neighboring state that is slightly higher than Illinois at 9.8%.

Missouri has one of the nation’s lowest corporate rates at 4%

These tax rates are not just a factor when businesses are trying to decide whether to locate in or move from Illinois. They also impact the companies that stay in Illinois.

“While economists have reached different conclusions about the size of the corporate tax’s negative impact, there is an overwhelming agreement, going back at least 35 years, on the negative relationship among the corporate tax, capital formation and economic output,” according to the Tax Foundation. “Reducing the tax burden on businesses increases capital formation, productivity and the willingness to innovate, which, in turn, drive economic growth.”

Economic growth means jobs, something that is especially hurting Illinois during the COVID-19 economic downturn. Illinois lost 423,300 jobs during 2020, a historic drop that means nearly 7% of its workforce vanished.

Corporate taxes have big costs relative to what they generate in tax revenue. On average nationwide, corporate taxes provided 2.27% of state general revenue in 2018.

But Illinois stubbornly sticks to high corporate taxes. From 2017 to 2020, Illinois dropped from 26th to 36th in the Tax Foundation’s ranking of the corporate tax component of its State Business Tax Climate Index. Indiana moved from 23rd to 11th and Missouri remained at No. 5, except for a dip to 6th in 2020.

High taxes and lack of opportunity are driving Illinoisans out. The state lost 253,015 residents from 2010 to 2020 – three times as many as any other state.

That link between corporate taxes and job growth is why neighboring states have cut corporate tax rates or kept them low. The revenue they raise is not worth the impacts on job producers or workers.

So when Pritzker and Illinois Democrats want to close corporate tax “loopholes” and then propose taking from $500 million to $1 billion from small businesses – the sources of 61% of Illinois jobs – or $900 million from corporations, it creates a threat to Illinois workers at a time when they already are hurting from the pandemic and associated government mandates.