Pritzker progressive tax would pummel small businesses that create jobs

Small businesses are the engine of Illinois’ economy. But those responsible for creating nearly two-thirds of Illinois’ jobs in 2017 would get hit under the progressive income tax plan just released by Gov. J.B. Pritzker.

Illinois Gov. J.B. Pritzker is vocal about the state’s need to support small businesses. But the members of that community who create the bulk of the state’s jobs would see a tax hike under a progressive state income tax plan released by the governor’s office.

On March 7, Pritzker’s administration unveiled proposed graduated rates for his income tax plan. The state’s current flat tax rate of 4.95 percent would rise to 7.75 percent on income above $250,000 for individuals, and again to 7.85 percent on income above $500,000. Individuals earning more than $1 million would pay a 7.95 percent effective rate, meaning it would apply to all taxable income.

One of many problems with Pritzker’s tax plan hits at the heart of job creation in Illinois. That’s because according to IRS data from 2016, a tax hike starting at $250,000 would affect about one-fourth of small businesses in Illinois that are taxed as individuals. Small businesses were responsible for creating nearly two-thirds of Illinois’ jobs in 2017.

“I am a big proponent of small businesses and having a government that stands for small businesses,” then-candidate Pritzker said in September 2018, according to the Northwest Herald. “We need to help people start businesses and grow those that already exist.”

At a time when Illinois’ private sector jobs growth ranks 46th among the nation’s 50 states, small businesses are certainly in need of support. But the rates released by the governor would put many of them under an increased tax burden in an already-hostile economic climate. These small business owners suffered back-to-back record income tax hikes in 2011 and 2017. Now many of them are bracing for a $15 minimum wage hike Pritzker signed into law in February.

Small businesses constitute the “vast majority” of businesses nationwide, according the Tax Foundation. As of 2014, they employed more than half the nation’s workforce.

That’s also true in Illinois: Businesses with fewer than 50 employees created the vast majority of net new jobs in Illinois in 2017, according to data from the U.S. Census Bureau. They accounted for 62 percent of Illinois jobs growth that year. Small business corporations have been the primary drivers of Illinois’ recovery from the Great Recession. They generated 119,000 new jobs in Illinois between 2010 and 2017.

These small pass-through businesses – which include sole proprietorships, partnerships and small business corporations known as “S corporations” – are exempt from paying the corporate income tax rate. The business owner instead pays both federal and state income taxes on his or her personal income, making them especially vulnerable to Pritzker’s progressive tax plan.

Illinois’ hostile tax and business climates have crushed the state’s labor market, and are the primary reasons Illinoisans are fleeing across state lines. Placing a heavier tax burden on much of the state’s small business community is bound to suppress investment in a state that desperately needs it, or send those who can move packing.

Rather than shuffling tax rates across income levels, state lawmakers should pursue reforms that address the root cause of the state’s addiction to tax hikes.