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

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Illinois' income tax increase to a flat 5 percent still is lower than Wisconsin's top income tax rate of 7.75 percent.

Doug Whitley, president of the Illinois Chamber of Commerce, said he was surprised by the size of the corporate tax increase, but he does not anticipate a "great fleeing of employers."

"I think it was a mistake personally. Illinois should never have a corporate income tax rate that is higher than your neighboring state," said Whitley. "The other big troubling concern about the action was there was no significant effort to cut spending or make any commitments to cut spending."

But other states also may move toward higher tax rates -- and at least one already has.

California Gov. Jerry Brown, in a effort to solve the state's fiscal crisis, increased the income tax for every bracket by 0.25 percent after a surcharge ended on Dec. 31, 2010.

California's state sales tax is set to drop one percentage point on July 1, but Brown has proposed a bailout initiative to extend the tax, which Henchman predicts will succeed.

Of the state tax increases in the country in 2010, Henchman said most were aimed at specific groups, including high-income earners, smokers or out-of-state business transactions.

Illinois Taxes Still Lower Than New York and New Jersey

New Jersey's "millionaire's tax" income tax rates, which had a max of 10.75 percent, expired on Dec. 31, 2009. The new top rate is 8.97 percent, which matches that of New York.

The individual income tax rates of New York and New Jersey may look gargantuan compared to Illinois' new rate of 5 percent. But Henchman said Illinois' individual income tax was the last bastion of refuge from expensive taxes that is no more.

"It used to be the tax that balanced out all the other problems," said Henchman. "The corporate tax was kind of high originally. The sales tax was famously high and burdensome. The property tax was burdensome. Having that low income tax rate balanced those things, but now it won't."

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