Small Business Out of Luck in Illinois

Tax hikes are a frustrating reality for small business owners across the state of Illinois , as its lawmakers this week passed the biggest tax increase in the state’s history.

The state Senate and House passed a measure that will temporarily (four years) increase individual income tax rates to 5% from 3%, and corporate tax rates to 7% from 4.8%. Lawmakers supportive of the legislation say the move is an attempt to close the state’s budget gap, which hit record levels during the recession.

Kim Maisch, Illinois state director for the National Federation of Independent Business, said that while the state has never been extremely policy-friendly to small businesses and investors, its 3% personal income tax was one of its few advantages.

“That was one of the few, and I mean few bright spots for small business in the state,” Maisch said.

She said the tax hikes are a lose-lose for Illinois businesses any way you look at it.

“There are three things small business can do—raise prices, cut payroll or cut benefits,” Maisch said. “There are only so many dollars they have to work with; it’s not that everyone is fat and happy. To put another tax burden on them is squeezing a balloon on one end and popping the other.”

Maisch also said the hikes will likely chase businesses out of the state.

Bill Strauss, senior economist at the Federal Reserve Bank of Chicago, told FBN the hikes were necessary and that residents shouldn’t be shocked in the least by the increase.

“We have a $12 billion shortfall in the state budget, and that is huge,” Strauss said. “I don’t think anyone in Illinois is surprised we are seeing these increases. But it will certainly impact growth and spending by consumers.”

The state’s low tax rates are what got it in this debt in the first place, Strauss argued, and the increases will bring Illinois up to speed with its neighbors in terms of taxes.

“We are basically bringing our tax rates, all in all, to something that is not significantly different from our neighboring states,” he said. “That is part of the problem, Illinois had such a relatively lower tax rate, and we were generating these huge deficits.”

Ray Keating, chief economist at the Small Business & Entrepreneurship Council, said the hikes are a death sentence for business investment and growth.

“It’s a clear signal to investors and businesses that they should go elsewhere,” Keating said.

Maisch agreed.

“Any new business will avoid Illinois like the plague,” she said.