“Millionaire tax” proposal would hike income tax rates by 62% for nearly 24,000 small businesses

Combined state and federal income taxes would have small businesses pay more than 50% of their top-end income in taxes.

Small businesses are Illinois’ primary job creator, both historically and in the recovery from the COVID-19 downturn. However, a referendum on Illinois’ Nov. 5 ballot could punish 23,740 Illinois small businesses with a massive 61% increase in their marginal state income tax rate and create a top tax rate of nearly 50.3% for these businesses, once all state and federal income taxes are considered.

Illinois voters will see a series of non-binding advisory questions appearing on their November ballots. One of which is to change Illinois’ income tax structure from a single flat rate to a system that would allow for income to be taxed at varying rates by proposing an additional 3% income tax on those with incomes more than $1 million.

The advisory question states the additional funds would be dedicated to property tax relief.  While this may sound like a good idea to Illinoisans who currently grapple with the second-highest property taxes in the nation, analysis shows that the proposed income tax hike would fall far short of raising enough revenue to cover the state’s own bills, let alone provide meaningful property tax relief to homeowners.

On top of failing to provide property tax relief and scrapping Illinois’ constitutionally protected flat income tax, the proposal would also raise taxes on some of Illinois’ most prolific job creators and create a combined state and federal marginal tax rate of 50.25% for partnerships and S-corporations, some of the most common tax-filing structures for small businesses.

In total, 23,740 s-corporations and partnerships, which “pass-through” their business income to their owners and pay taxes as individuals, would see their top marginal state income tax rates raised by 61% from 4.95% to 7.95%. After factoring in the various other state and federal income taxes paid by these individuals, the top marginal income tax rate would tally 50.25%.

Research has shown an increase in the top marginal tax rate is associated with a decrease in hiring activity of entrepreneurs and lower wages for their employees. Illinois already has one of the highest unemployment rates in the nation in addition to some of the slowest wage growth for employees. Illinoisans should reject this latest call for higher taxes on the state’s vital small business community.