Why Illinois lawmakers can and should withdraw the progressive income tax hike

State lawmakers in 2019 passed a progressive income tax amendment at the behest of Gov. J.B. Pritzker. Now that coronavirus has ravaged the state’s small business community, they should withdraw the amendment.

Illinois small businesses are reeling in the wake of the COVID-19 pandemic and associated economic shutdown.

And without action from the General Assembly, they’ll be staring down a crushing tax hike as well.

The progressive income tax amendment passed by the General Assembly last year removes Illinois’ flat income tax protection, allowing for a $3.7 billion income tax hike that would raise taxes on around 100,000 small businesses across the state.

Small business owners from Decatur to Oak Lawn to Palos Hills to Bradford to Elk Grove Village to Chicago and beyond are pleading for state lawmakers to remove that amendment.

Illinois Senate President Don Harmon, a chief sponsor of the progressive income tax amendment last year, was unsure about lawmakers’ ability to withdraw the tax hike proposal in an April 5 interview on WCIA.

“I don’t know if there’s even a mechanism to take it off the ballot,” he said.

But the Illinois Constitution clearly lays out the rules for withdrawing a constitutional amendment initiated by the General Assembly, requiring only a simple majority vote in the House and Senate to do so.

The constitution states:

“Amendments approved by the vote of three-fifths of the members elected to each house shall be submitted to the electors at the general election next occurring at least six months after such legislative approval, unless withdrawn by a vote of a majority of the members elected to each house.”

Harmon noted the introductory rate structure only hikes taxes on income over $250,000. The plan also offers miniscule tax relief to those making under $250,000, which has already been wiped out by gas tax and vehicle fee increases, not to mention rising property tax bills that rank as the highest in the nation. Further, lawmakers offered no protection against future income tax hikes on the middle class.

“Most small businesses are just individuals who are the beneficiaries of their business operation, they get a pass-through income and they pay the individual income tax,” Harmon said. Harmon is correct. And that’s why lawmakers must remove the ballot question.

The progressive income tax rate structure passed by the General Assembly would hike taxes on around 100,000 Illinois small business owners in Illinois who file as S-corps or partnerships (also known as “pass-through” businesses). Small businesses are the economic engine of the state – responsible for roughly 60% of new job creation. Hiking their taxes would only serve to kneecap the economic recovery from the current downturn.

Beyond the hike on pass-through business income, Gov. J.B. Pritzker’s progressive income package would also hike Illinois’ total corporate income tax rate to at least 10.49%, and state law would allow for a corporate tax rate as high as 15.28%.

For context, the nation’s highest marginal corporate income tax rate is 12% in Iowa, according to the Tax Foundation. And that’s scheduled to drop to 9.8% in 2021. The second-highest is New Jersey at 10.5%, putting Illinois in a virtual tie for the highest tax on business income should the new rates take effect.

This is the exact opposite of what Illinois lawmakers should be doing after the first year on record where Illinois lost private-sector jobs amid a national boom.

Instead pursuing an expensive and contentious ballot fight that could end with tax hikes on Illinois small businesses at a terrible time, lawmakers should listen to local entrepreneurs and withdraw the question altogether.