Illinoisans are sick of new taxes; reject payroll tax

As new tariffs threaten to push up prices, Illinois’ punishing tax climate already is stretching many residents’ and businesses’ budgets.

Instead of looking for ways to relieve the burden on families and businesses, lawmakers in Springfield are considering policies that would aggravate the problem. State leaders recently proposed a “payroll tax,” a tax paid on the wages and salaries of employees. This essentially is a new income tax specific to labor income, despite Illinois already having an income tax and the state’s constitution prohibiting more than one tax on income.

The legislation calls for an initial 1.12% tax on wages to take effect Jan. 1, 2027, which would be disastrous for residents and businesses in Illinois.

The premium, or tax rate, would be determined by the cost of the family and medical leave program it will fund. Similar to unemployment taxes, as more people use the fund for family or medical leave, the higher the tax rate will go.

Lawmakers should work to lower taxes, not add new ones. Illinoisans have made it clear, they are sick of new taxes. A new poll from the Illinois Policy Institute found 54% of Illinois voters said high taxes were the No. 1 issue facing the state, with the economy ranking second. This represents a shift from past polls which showed social concerns such as crime, immigration and homelessness dominated public attention. Today, Illinoisans worry more about making ends meet than they do about crime.

It’s easy to see why. The Illinois tax environment is extremely hostile for residents and businesses, who suffer the second-highest property and gas taxes in the nation, the third-highest corporate income tax, and seventh-highest sales taxes. All together, Illinois has the highest state and local tax burden in the nation.

A payroll tax would make it worse. Unlike a traditional income tax, payroll taxes are particularly harmful because:

• Every employee will have to pay 40% of the premium no matter what. Tax liability typically cannot be reduced via deductions and credits.

• It would become a new, mandatory business expense as employers pay a percentage of salaries. Unlike an income tax, which is zero if there is no profit, businesses pay a payroll tax regardless of whether they’re profitable or not.

• It is a direct disincentive to hiring. A payroll tax would encourage employers to offshore, automate or not invest in hiring, because it charges per employee and scales as the employees and salaries rise.

The language of the tax also states the rate will change automatically each year, up to a cap of 1.25%. But if the family and medical leave program costs more than anticipated, this cap could go up. There is no certainty for what the future costs will be, which makes it even more difficult for a business to try to plan for it.

There’s also a chance this tax is illegal. Illinois businesses already pay a corporate income tax, and a payroll tax could be seen as a form of “double taxation,” which is unconstitutional in Illinois.

The pattern is clear: when Illinois politicians push for higher taxes and more revenue, people leave. Since the pandemic, Illinois has lost more than 418,000 residents and hundreds of businesses to other states, and the exodus could speed up. The poll reveals 49.5% of voters would move out of Illinois if given the opportunity, an increase from January. Only 40% said they would rather stay.

Every Illinoisan deserves the opportunity to thrive here, but the state’s high taxes and worsening economic outlook are driving existing and would-be residents and businesses away.

This should be a wake-up call for Gov. J.B. Pritzker and the Illinois General Assembly. Residents and businesses are sick of onerous taxes — they must reject a payroll tax.

• Matt Paprocki is the president and CEO of the Illinois Policy Institute.