Understanding the business tax hikes of the past four years

There are many reasons why businesses thrive in Illinois: we have a large, diverse, productive and educated labor force; the cost of living is often cheaper than states on the coasts; and there's easy access to robust transportation.

And of course, we're home to arguably the best people in the country.

But being an Illinois business owner is not without its challenges. In the past four years, Illinois has passed 24 tax and fee hikes worth about $5 billion to taxpayers. Of those taxes and fees, about $650 million has been targeted specifically at businesses.

Why would you tax something you want more of? Illinois politicians have told us for decades they are going to increase jobs and support businesses, yet their actions tell another story.

This is why Illinois was the only state in the Midwest to decline in the Tax Foundation's State Business Tax Climate Index. From 2017 to 2022, Illinois' tax policy became less friendly for businesses, dropping to 36th from 26th place.

Meanwhile, each of our neighboring states improved in the index, save for Indiana, which held steady at ninth. Many states used extra revenues from federal stimulus to implement permanent, pro-growth reforms, while Illinois merely kicked the can on expected tax hikes until after the election.

Understanding the recent business tax hikes:

Reverse phaseout of costly corporate franchise tax: $20 million

In 2019, Gov. J.B. Pritzker touted the phaseout elimination of this tax as an accomplishment of his first year. But two years later, he turned his back on businesses and reversed the law completely.

This tax actually has nothing to do with franchise businesses and is instead a "capital stock tax," which taxes businesses on their net worth regardless of their profitability. Only 15 other states implement this tax, which is complicated and expensive to comply with, especially for small businesses.

Cap, delay credits for business operating losses for three years: $314 million

If a business loses money in 2020 and 2021, but earns a profit in 2022, tax law allows it to deduct the two years of losses from its earnings in 2022 and pay taxes only on the difference. This helps keep tax policy neutral over time and is especially important following the recent pandemic when many businesses experienced losses.

Unfortunately, Pritzker signed off on a $100,000 per year limit on losses carried forward for three years.

Business owners are still able to carry forward losses above that amount, but they can't claim the deduction until 2024, which hurts their cash on hand to grow, hire or give raises. Ultimately, this means a poorer recovery for every Illinoisan.

Delay expensing of business investments: $214 million

Illinois decoupled from federal provisions intended to promote pro-growth investments.

Federal tax reform included changes to allow full and immediate expensing, or 100% bonus depreciation, meaning companies can deduct the entire cost of a machinery or equipment investment in the year it was made, rather than dragging out the expensing over the life cycle of an asset.

But now, Illinois businesses must use the prior system of stretching out the deduction for Illinois taxes, discouraging the very investments that will help the state recover from the COVID-19 recession.

Double tax profits U.S. companies earn abroad: $107 million

Another aspect of federal tax reform was to end double taxation on profits U.S. companies earned overseas by allowing a 100% deduction for foreign dividends paid to the parent company. Those profits would have already faced taxation in the country where the income was earned.

Pritzker eliminated the credit for foreign dividends, which discourages those profits from being repatriated and brought to Illinois if the profits would receive more favorable tax treatment overseas.

Putting it together

Having a competitive tax system is important, and Illinois is in danger of falling out of the race completely. If voters approve Amendment 1 on the Nov. 9 ballot, our businesses will be at risk for significant tax increases.

Illinois politicians must prioritize taking care of businesses and find ways to cut the punitive tax burdens on them.

• Matt Paprocki is president of the Illinois Policy institute.