Raising Illinois Income Tax

Raising Illinois Income Tax

Illinois residents could be working longer to pay their state taxes in future years under legislation unveiled by House Deputy Majority Leader Lou Lang (D)—a proposal that would see the top rate soar from 3.75 to 9.75%. Were the tax increase adopted, Illinois would fall from 23rd to 48th on the Tax Foundation’s State Business Tax Climate Index, above only New York and California.

Since the partial expiration of the state’s temporary tax increase under which the individual income tax briefly stood at 5.0%, many in the legislature have clamored for a tax increase, and particularly for the introduction of a graduated rate tax in the Prairie State. Intended to facilitate the payment of the state’s accumulated unpaid bills, the temporary tax increase partially sunset in 2015, with the rate dropping to 3.75%, still modestly higher than the pre-tax hike flat rate of 3.0%. However, the state still has over $7.5 billion in unpaid bills, and Gov. Bruce Rauner (R) and legislative Democrats continue to fight over adoption of a state budget, with Democrats seeking additional revenues and Rauner insisting on a range of structural reforms as a prerequisite to considering any tax changes.

Under pending legislation backed by top Democrats in the state, Illinois could replace its current 3.75% individual income tax with a four-rate system topping out at 9.75%. House Bill 689, sponsored by Representative Lang, would give Illinois the fourth highest top marginal income tax rate in the country, after California, Oregon, and Minnesota. Because the proposed rate schedule does not double bracket width for joint filers, the bill would also introduce a marriage penalty, meaning that married couples could pay more than they would as single filers. The proposed rates and brackets under HB 689 are as follows:

HB 689 Rates and Brackets

Single Filer Joint Filers
Rate Bracket Rate Bracket
3.50% > $0 3.50% > $0
3.75% > $100,000 3.75% > $200,000
8.75% > $500,000 8.75% > $750,000
9.75% > $1,000,000 9.75% > $1,500,000

Because the state constitution currently prohibits the imposition of a graduated-rate income tax, the legislation is contingent on voter ratification of a constitutional amendment (HJRCA 59) lifting the restriction. Previously, House Speaker Michael Madigan (D) proposed a 3% surcharge on income above $1 million. Although it is perhaps unlikely that the two pieces of legislation would be adopted in tandem, doing so would result in a top rate of 12.75%, inching the state closer to California’s top rate of 13.3%.

Although most individual Illinoisans would not be exposed to higher rates under HB 689, it is important to bear in mind that many small businesses are subject to the individual income tax. In fact, while most pass-through businesses (S corporations and partnerships) lack sufficient adjusted gross income (AGI) to be exposed to the new higher tax brackets, those businesses that would experience a tax increase under HB 689 account for nearly 72% of all pass-through income.

Raising Illinois Income Tax