Small business employ 44% of workers in Illinois, two laws set to expire will hurt if not renewed

by Terri Dee
Illinois News Connection

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A large tax hike could appear soon, that would affect Illinois' small businesses still rebounding from the pandemic. One group hopes Congress will act before two bills expire, and the tax increase takes effect.

A small business advocacy group, The National Federation of Independent Businesses (NFIB) says one of them - the 20% Small Business Deduction Act - was created to align small business tax rates with those of larger corporate competitors.

The group's Vice President for Federal Government Relations Jeff Brabant said...

"It's difficult for small businesses to be able to compete with a lot of their larger competitors, and increasing prices isn't always a great option for them," said Brabant. "If you're an employee and you go to a small employer who may not have the money to be able to offer great benefits, versus a large employer who can offer those benefits, it's always going to put the smaller employer at a little bit of a disadvantage."

If Congress decides not to renew the 20% Small Business Deduction Act, Brabant predicted that 90% of America's businesses would face additional barriers to growth and hiring more workers.

According to the U.S. Small Business Administration's 2023 Profile report, Illinois has slightly more than 2 million small business employees - which account for 44% of the state's employees.

The other law up for review by the House is the Main Street Tax Certainty Act, which permits small businesses to deduct up to 20% of their qualified business income and make it a permanent deduction.

Brabant noted that the NFIB strongly supports both measures, which expire on December 31, 2025 - and have bipartisan support.

As the country waits to see the presidential election results, he said he believes the plight of small businesses should be the "number one issue" on Congress's mind.

"It shouldn't be a Republican or Democratic issue," said Brabant. "This should be 'small businesses are the foundation of the economy,' and I don't think anyone wants to see Main Street businesses have a tax hike."

Brabant said the organization is glad both presidential candidates have talked about small businesses, because these discussions don't always occur.

He said NFIB's focus is to educate and increase Congress' awareness, and he said he hopes they will act sooner rather than later.

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Keywords: Illinois small business tax increase, 20% Small Business Deduction Act, Main Street Tax Certainty Act, Small business tax reform 2025, Impact of tax hike on small businesses

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.