Small businesses could end up pay more with new "fair" taxing plan

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by Bryce Hill, Senior Research Analyst
Illinois Policy

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COVID-19 and state-mandated restrictions already damaged Illinois small businesses, but the extra challenge of a 50.3% marginal income tax rate awaits if Gov. J.B. Pritzker’s “fair tax” is added to their state and federal income tax burdens.

Despite wide-spread agreement that you should not raise taxes during an economic downturn, Pritzker insists Illinois needs his $3 billion income tax hike now more than ever. But massive job losses and stubbornly high unemployment rates mean there might not be a worse time for a tax hike. Hiking taxes during a recession, or just as the economy attempts to get back on its feet, would be a clear policy mistake. One reason is the income tax hike would hit the state’s largest job creators – small businesses – the hardest.

Small businesses are responsible for 60% of the net job creation in Illinois and are the businesses most at risk from the economic fallout of COVID-19. Changing to a progressive income tax in Illinois could mean a massive tax hike for these businesses and create marginal income tax rates in excess of 50% when all state and federal income taxes are included. 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.

When considering all of the layers of income taxes Illinoisans face, small businesses – who pay taxes as individuals – could be left paying 50.3% of their top-end income in taxes. Total marginal income tax rates would range from 31.6% to 50.3% thanks to federal income tax, Social Security tax, Medicare tax, state income tax, and Illinois’ Personal Property Replacement Tax.

The increase in the state income tax from the current flat rate of 4.95%, to up to 7.99% under the progressive income tax, would mean that some small businesses would face a state income tax hike 5 times larger than big businesses.

Progressive income tax hike could be nearly 5 times higher for small businesses than large

While the total corporate income tax rate – including the Personal Property Replacement Tax – will be hiked by 10% (from 9.5% to 10.49% when including the replacement tax), the tax hike for pass-throughs could be up to 47% (6.45% to 9.49% when including the replacement tax).

Research from April showed fewer than half of all U.S. small businesses expected to re-open this year if the crisis lasted more than four months. For the small businesses that do manage to survive, the last thing their owners and employees need is a tax hike to crush them while they’re attempting to get back on their feet.

Small businesses such as S-corps, partnerships, LLCs, and sole proprietors make up a large majority of business establishments in Illinois, representing 71% of all private for-profit businesses, totaling more than 210,000 establishments. These small businesses also employed nearly half of Illinois’ private for-profit workforce prior to the COVID-19 downturn, or more than 2.3 million Illinoisans.

Contrary to the governor’s claims, a progressive income tax hike is the exact opposite of what Illinois lawmakers should be doing in the midst of the COVID-19 crisis.

Nearly 700,000 Illinoisans remain out of work as a result of the pandemic. That is after the first year on record in which Illinois lost private-sector jobs amid a national boom.

Imposing marginal tax rates exceeding 50% for Illinois’ largest job creators during the current economic crisis would be a painful mistake.

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Originally published by Illinois Policy on October 8, 2020. Published by permission.

Photo of the Day - October 31, 2020

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Tough exit for Spartans

Senior Drew Coursey hugs teammate Crayton Burnett after the Spartans first-round loss Williamsville on November 2, 2019. The Bullets, who went on win the IHSA Class 3A title, eliminated SJO from the postseason by away of a 54-26 season-ending loss.

(Photo: PhotoNews Media/Clark Brooks)

One step back, Champaign County joins the rest of the state in Coronavirus resurgence mitigation

On Friday, Governor JB Pritzker and the Illinois Department of Public Health (IDPH) announced resurgence mitigations would go into effect in Region 6 - which includes Champaign, Clark, Clay, Coles, Crawford, Cumberland, Dewitt, Douglas, Edgar, Effingham, Fayette, Ford, Iroquois, Jasper, Lawrence, Macon, Moultrie, Piatt, Richland, Shelby and Vermillion counties - starting 12:01 a.m. on Monday, November 2.

The 21-county region recorded a 7-day rolling average test positivity rate of 8 percent or above for three consecutive days, which exceeds the thresholds set for establishing mitigation measures under the state’s Restore Illinois Resurgence Plan.

In order to get back to Phase 4 and back to having indoor dining, the region will need a positivity rate of less than 6.5 percent for three straight days. If that rate stays above 8 percent for 14 days, then the region will face even more restrictions.

While Champaign county, if you ignore the University of Illinois' testing efforts, boast a 7-day positivity of 5.7, six counties are flaunting double-digit numbers. Coles county is currently at 11, Effingham 11.2, Macon 13.7, Douglas 14.9, Shelby 15.9 and Cumberland 26.1.

The resurgence mitigation restrictions target bars and restaurant in order to control the spread of the coronavirus. Governor Pritzker has said there are dozens of studies and articles on outbreaks in bars and restaurants to justify reducing the services they provide.

Mitigation measures taking effect November 2 in Region 6 include:

Bars

• No indoor service
• All outside bar service closes at 11:00 p.m.
• All bar patrons should be seated at tables outside
• No ordering, seating, or congregating at bar (bar stools should be removed) 
• Tables should be 6 feet apart 
• No standing or congregating indoors or outdoors while waiting for a table or exiting
• No dancing or standing indoors
• Reservations required for each party
• No seating of multiple parties at one table

Restaurants

• No indoor dining or bar service
• All outdoor dining closes at 11:00 p.m.
• Outside dining tables should be 6 feet apart
• No standing or congregating indoors or outdoors while waiting for a table or exiting
• Reservations required for each party 
• No seating of multiple parties at one table

Meetings, Social Events, Gatherings

• Limit to lesser of 25 guests or 25 percent of overall room capacity
• No party buses
• Gaming and Casinos close at 11:00 p.m., are limited to 25 percent capacity, and follow mitigations for bars and restaurants, if applicable

Two area restaurants, Buford's Pub in Sadorus and Apple Dumplin', just outside the Urbana city limits, informed customers via Facebook that they intend remain open despite the restrictions from the state. Both business saw overwhelming support in both comments and "Likes".

Jeff Buckler, owner of Buford’s Pub told The News-Gazette it wasn’t an easy (decision) to make.

"Let me put it that way. We went through the last one; it was supposed to last two weeks and lasted what, 120 days?" he said. "I’m fighting for every small business out there. I’m just tired of being told what to do when they’re using the bars and restaurants as scapegoats. What about the Walmarts and Targets?"

On a Facebook, a post by Buford's Pub's said, "Its not just about my business its about all small business stand up against a dictator. Bars and (sic) are getting the brunt of this and combined we are less then (sic) 9% of the whole issue."

Meanwhile two days earlier, bars and restaurants in Region 9 received similar news.

A Crystal Lake attorney on Thursday filed a 78-page lawsuit on behalf of 37 McHenry County restaurants, hoping to bring the state’s mitigation plans to a halt and allow owners to continue offering indoor service.

A day later, McHenry County Judge Thomas Meyer denied the application for a temporary restraining order. The Northwest Herald reported he made his decision based on new facts and that mitigation order was not an extension the governor's executive order from last March.

"It was a difficult and unpleasant order to enter," Meyer said in the article. "But I do believe that there is a basis for the new executive order and that is how we end up where we are."

Buckler and Jim Flanigan, owner of the Apple Dumplin', have retained attorney Tom DeVore, who made headlines this summer when he represented state Representative Darren Bailey effort to null the state's mitigation order in a lawsuit and won. It was through DeVore's efforts a Clay County judge declared the Governor’s continuing use of emergency powers as an overstep of his constitutional authority.

The ruling, depending on who you speak with, is only applicable in south central Illinois county where the daily testing positivity is at 14.9 as of the time of this story and pushing a 7-day rolling average of 9.7. An appeal filed by the governor is still pending on the Clay County case.