Illinois’ tax code ranks 29th among the 50 states in its neutrality and transparency, dropping a spot from last year’s ranking due to rate increases on individual and corporate income, according to a study released Tuesday.
The Tax Foundation’s annual State Business Tax Climate Index ranks states based on their tax structure. It compares all 50 states on more than 100 variables in five tax categories — corporate, sales, unemployment insurance and property and individual income.
States with complex tax codes that distort business decisions were ranked lower on the list, while states with transparent, fair tax codes scored near the top, according to lead report author Jared Walczak, a senior policy analyst at the Tax Foundation.
Illinois ranked 36th in corporate tax structure, 35th in sales taxes, 42nd in unemployment insurance, 45th in property and 16th in the individual income tax category. Walczak said the state fell to the No. 29 position overall because of rate increases on individual income and corporate income taxes this year.
The state legislature in July overrode Gov. Bruce Rauner’s veto to adopt a budget that increased the state’s flat-rate individual income tax from 3.75 to 4.95 percent, and the corporate income tax rate from 7.75 to 9.5 percent to address a significant shortfall and backlog of unpaid bills, he said.
“This is an unusual and unique aspect of Illinois governance — no other state has a category called unpaid bills,” Walczak said.
Temporary tax increases have “backfired in the past” and forced the state to offer “significant preferences” in the code for select business to keep them from fleeing to other states, he said.
“We’ve seen tax increases again, we’ve seen a failure to address several structural concerns of long standing, which is why the state ranks a little worse than the middle of the pack on structure and perhaps even struggles more than that ranking would indicate,” Walczak said.
Neighboring states Indiana and Wisconsin ranked 9th and 38th, respectively.
Walczak said it’s better to have a neutral code that doesn’t favor particular industries, investment decisions or activities but rather is competitive for all comers.
“A good tax code raises the necessary revenue but doesn’t seek to change economic decision-making through that code,” Walczak said. “All states (do that) to some degree, but Illinois more than most does rely heavily on targeted incentives to maintain jobs in the state despite the high rates.”
The Tax Foundation is a nonpartisan policy educational organization that works with lawmakers to provide resources and analysis and helps to inform the decisions the policy makers. The goal of its annual study is to serve as a “diagnostic tool” for policymakers, individuals and businesses.
“The rankings are what capture attention — people care about where their state ranks but that hopefully is the start of a conversation,” Walczak said. “We do have over 100 variables so that individuals who care about this can look to see where their state is highly competitive and where it may be lagging behind and perhaps see a path forward to improvement of their state’s tax code.”
Wyoming, South Dakota and Alaska were the top-ranked states. California, New York and New Jersey landed in the bottom three.
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