Want to crush Illinois’ small businesses? Pass a progressive tax

State Rep. Lou Lang’s progressive tax would hurt the middle class by making Illinois home to the second-highest small-business tax rate in the U.S.

Pete Paulin started his business with $400 and a garage.

Twenty-five years later, Decatur-based 300 Below Inc. is helping industrial companies across Illinois and the globe extend the life of their equipment by putting it through a cryogenic freezing process that Paulin pioneered.

Paulin’s had a lot of success and endured tough times as well. But a massive tax hike for businesses such as Paulin’s, now being considered in Springfield, would make it nearly impossible for 300 Below to continue operating.

“We’d be getting close to the point where it’s not worth going to work,” Paulin said. “In Illinois, anyway.”

State Rep. Lou Lang’s tax bill, House Bill 689, is a nearly $2 billion tax hike that more than doubles the top personal income-tax rate in Illinois, bumping it up to 9.75 percent from 3.75 percent. HB 689 is part of a larger plan to institute a progressive tax in Illinois through a constitutional amendment.

Bearing the burden of Lang’s tax hike would be the backbone of Illinois’ economy: small businesses. Both the Illinois entrepreneurs who create those businesses and those who work for them should be worried.

Lang’s progressive tax would make Illinois home to the second-highest small-business tax rate in the U.S.

“We go to work every day for 12 months out of the year. But like a lot of businesses, we only make a profit on the last 20 days in December,” Paulin said. “When you keep cutting into that, it strangles the business.”

The Paulins are far from the only family that shudders at the thought of another tax hike. More than 31,000 small businesses in Illinois would pay more in taxes under Lang’s plan, according to IRS data.

These businesses wouldn’t just pay more in taxes, they’d also be put at a huge disadvantage against their corporate competitors in Illinois.

All told, small businesses would pay a top state income-tax rate of 11.25 percent under Lang’s proposal. But corporations would still pay the current 7.75 percent corporate income-tax rate at the state level.

Small businesses employ 54 percent of Illinois workers, according to data from the U.S. Census Bureau. Higher taxes wouldn’t just punish entrepreneurs; they would also whack the workers they employ, as businesses would try to cut costs to keep their doors open. Paulin said he would consider taking his business out of Illinois altogether.

Lang has countered criticism by saying 99 percent of Illinoisans would receive a tax cut under his plan. But even a cursory look at how the progressive tax has played out in other states shows that once the flood gates open, lawmakers are keen to jack up tax rates on the middle class rather than make tough but necessary reforms.

Out of the 33 states that have a progressive income-tax system, 31 hit the middle class with a higher rate than Illinois’ 3.75 percent.

Given Illinois politicians’ track record of trying to solve all of the state’s problems with more revenue, entrusting them with the power of a progressive tax almost certainly means painful tax hikes on the middle class.

In fact, Illinois politicians themselves have already experimented with a progressive tax – on casinos. Average taxpayers should be warned of the tax-hike roller coaster that’s ensued. Casino tax rates in Illinois were a flat 20 percent until 1998, when Illinois lawmakers passed a progressive income tax for casinos. The top rate is 50 percent today, and reached as high as 70 percent in 2003.

In the short term, Lang’s tax hike will hit middle-class Illinoisans because their employers won’t be able to expand. And in the long term, a progressive tax system will inevitably hit the pocketbooks of the state’s poor and middle-class residents as politicians use every tool at their disposal to raise more money.

Instead of raiding the pockets of people such as the Paulins, politicians need to go back to the drawing board and realize the state has a spending problem, not a revenue problem. For the sake of Illinoisans at every income level, the Land of Lincoln must cultivate its small businesses, not cut them off at the knees.