For small businesses, looming graduated tax will double down on hardship

Samantha Palya started her pet-grooming business when she was 21. Based in South suburban Palos Hills, Absolutely Pawfect Pet Styling was growing at such a rapid pace that Palya was considering expanding her existing brick and mortar space or adding a second location.

Coronavirus brought all of that to a screeching halt.

"We have really good, loyal clients, and we do think people will come [back] as soon as we open our doors," Palya said. "The problem is this: we fall in that luxury category where people need to pick paying their gas, electric or food bill over getting a pet groomed."

Absolutely Pawfect Pet Styling was planning to increase its staff of nine - until the economy succumbed to the COVID-19 pandemic.

Most of her employees are young adults who've been working to buy their first car or a home of their own. Palya knows they're worried, and she's worried about them, too.

Palya's far from alone. Small businesses in Illinois are responsible for 60 percent of the state's net job creation. They're also the businesses most at risk from the economic fallout of COVID-19.

An Illinois Policy Institute analysis found industries most affected by social distancing and shelter-in-place safety measures contribute more than $100 billion to the state's annual economic activity - roughly 11 percent - and employ one-quarter of employed Illinoisans.

Yet, not only are those 1.5 million Illinoisans at risk of losing their jobs or facing reduced hours during the pandemic, but the small businesses already suffering the most during the state's lockdown will soon be hit by a double whammy.

As Gov. J.B. Pritzker calls for residents around the state to be patient with efforts to flatten the curve, he's also doubling down on his push for a progressive income tax that would hit the state's largest job creators - small businesses - the hardest.

The progressive income tax hike on the table this November, just six months from now, is expected to affect more than 100,000 small businesses. Furthermore, small businesses set up as pass-throughs - like Palya's - could see tax hikes of up to 47 percent, while the corporate income tax would go up by just 10 percent.

Fewer than half of all U.S. small businesses expect to be reopened this year if the crisis lasts more than four months, according to new economic research published by the National Bureau of Economic Research.

What's more, a shift to a progressive tax means that those that manage to survive are likely to be crushed just as they're attempting to get back on their feet. Economists have also shown that an increase in the top marginal tax rate is associated with a decrease in hiring activity of entrepreneurs and lower wages for their employees. After the unprecedented economic contraction caused by COVID-19 lockdowns, a progressive income tax would erase any hope for a quick recovery in Illinois.

Economists are in near-unanimous agreement: Reducing the harm of recessions requires expansionary monetary and fiscal policy. That means avoiding tax hikes while spending on the programs Illinoisans truly need.

This approach is bipartisan. "You don't hike taxes in a recession," former President Barack Obama quipped in 2009.

With lockdown orders in place through May and possibly beyond, state officials have already pushed back the income tax filing deadline to be in line with the federal government's July 15 deadline and have made millions of dollars worth of assistance available to small businesses through the Illinois Department of Commerce and Economic Opportunity.

But Illinois businesses also need long-term predictability and relief just as much as - perhaps more than - short-term help.

Lawmakers must remove the progressive income tax constitutional amendment from November's ballot, moving instead to protect its stable flat tax. The introduction of a $3.7 billion progressive tax hike, particularly at the onset of an economic recovery, will cost the state thousands of lost opportunities for workers and hamstring the economy as it attempts to rebound. Businesses like Palya's pride themselves on having the grit and stick-to-itiveness to get them through the toughest of times. But these times are not only tough, they're also unprecedented.

What Samantha Palya and others around the state need more than ever is a playbook, and the knowledge and hope that state government sees their livelihoods just as they do: #TooSmallToFail.

• Orphe Divounguy is the chief economist at the Illinois Policy Institute, a nonpartisan research organization.