Illinois State Tax Increase May Pave Way for Other States to Fix Budget Woes

Jan. 14, 2011 — -- Illinois companies are slamming the state's move to the third-highest corporate tax rate in the country, signed into law Thursday, saying they are concerned about its effect on business.

But amid local budget shortfalls, other states might not find such tax hikes such a bad idea, and some tax policy experts said other Americans should brace themselves for inevitable tax increases in their states.

Joseph Henchman, tax counsel for The Tax Foundation in Washington, D.C., said the Illinois tax hike is only the beginning of what will be a tumultuous year for state tax rates.

"It will be quite an active year," said Henchman. "It might be a year of dramatic tax increases given the constraints states are under. There's always pressure to increase spending more than revenue growth, but the Tea Party and limited government dynamics will add to that pressure."

Henchman said other states that will definitely see tax increases are those in the worst fiscal trouble -- California and Maryland, and potentially New York.

But the new Illinois tax rate legislation, signed into law Thursday evening by Gov. Pat Quinn, already is making waves in the Upper Midwest.

James O'Donnell, vice president of a manufacturing company outside of Chicago, said he is not just troubled but angry that legislators this week approved a 30 percent corporate tax rate increase. The rate increased to 9.5 percent from 7.3 percent, and the individual income tax increased to 5 percent from 3 percent, retroactive to Jan. 1, 2011.

"Someone asked me if this was that big of a deal, and I answered immediately, 'Yes, it definitely is a big deal,'" O'Donnell said. "It's bad for our employees, the future of our company, and it's not good for our customers either. This does nothing but increase our costs."

O'Donnell said his company, CamCraft Inc., had to make "painful decisions" in 2009 to stay afloat without raising customers' prices during the downturn. He said he is bitter that the state legislature did not do the same.

"The Illinois legislature made a very strong statement that they don't care about businesses and manufacturing," O'Donnell said.

He said his company, which has 275 employees and one facility in Hanover Park, Ill., may consider adding a second location in the future. And the Illinois tax increases give more reason to look outside the state.

Nick Kalivas, vice president of financial research with brokerage firm MF Global, said that the tax increase was an "anti-growth" measure.

"My concern from an economic standpoint is that gasoline prices are very high in Illinois, you've got fairly strict worker compensation laws, the regulatory environment is relatively stiff here, and you're taking money from the consumer," said Kalivas from his office in Chicago. "This tends to dampen the growth outlook."