The Pantagraph

Expert: Ill. tax system deters business

Friday, August 27, 2010

NORMAL — The state must cut taxes on businesses but can offset that lost revenue by broadening its sales tax and being less reliant on economic incentives, a tax expert told McLean County business leaders Thursday.

Illinois ranks 30th out of 50 on the State Business Tax Climate Index, a 100-variable measure of business-friendliness created by the Tax Foundation, a Washington, D.C.-based nonprofit. Much of that is because of the state’s total corporate income tax of 7.3 percent, higher than the national average and that of neighbors Kentucky and Missouri, said Tax Foundation president Scott Hodge.

“When it comes to fixing your tax system, this is where the legislature needs to focus,” Hodge told more than 165 business and community leaders at the McLean County Chamber of Commerce’s Economic Vision Luncheon, held at the uptown Marriott Hotel and Conference Center.

Plus, Illinois is one of only 22 states with a franchise tax — 0.10 percent annually on the company’s paid-in capital, up to $2 million. All told, it makes recruiting business into Illinois difficult, especially in a globalized economy, Hodge said.

“You’re not just competing against Indiana,” said Hodge, an Illinois native. “You’re competing against India.”

Taxes have become a key issue in Illinois’ race for governor. Democratic Gov. Pat Quinn has called for a 33 percent income tax hike to help pay for schools. While offering few details, state Sen. Bill Brady, R-Bloomington, has said he will close the $13 billion budget deficit but not raise taxes.

Illinois’ budget problems stem in part from its losing 325,000 taxpayers to other states in the last 15 years, for whatever reason, Hodge said. “As people move, they take their income with them,” he said, putting the inflation-adjusted figure at around $31 billion.

But messing with the state’s lower-than-average flat income tax, with a top rate of 3 percent, isn’t the answer, he said. While nine states don’t have an income tax, neighbors like Iowa have top rates as high as 8.98 percent.

“This is where Illinois shines,” Hodge said. “This is really an asset to be protected.”

Hodge laid out what he said was a way to pay for the business tax cuts and unchanged income tax, in part by extending the full sales tax to food and medical purchases, bringing in an estimated $1.4 billion.

Illinois can also save $130 million by eliminating funds for special economic development programs, which offer special enticements for companies to locate or expand here. Hodge said low taxes should be an everyday thing, not a one-time offer, comparing a Walmart to the occasional sale at Neiman Marcus.

“It makes chumps out of everyone who didn’t get in on the sale,” he said.