Proposed federal tax reform would lower federal corporate tax rates from 35 to 20 percent. While that makes the U.S. more attractive globally, the Tax Foundation says Illinois would still have to compete with its neighbors.
President Donald Trump unveiled the plan at a rally in Indiana Wednesday. He said Washington needs to take a cue from Indiana.
“It’s time for Washington to learn from the wisdom of Indiana,” Trump said. “We need Washington to promote American jobs instead of obstructing them.”
Tax Foundation’s Nicole Kaeding said in broad strokes the plan would lower the tax brackets from seven to three, would lower the corporate rate from 35 to 20 and a variety of other things.
She said the proposed federal overhaul would be good news for economic expansion.
“Right now, the United States has the highest corporate income tax rate in the industrialized world,” Kaeding said, “and this would lower us below the average of industrialized countries.”
That makes the U.S. more attractive to outside investors looking to expand their operations.
“But I think that then Illinois would be competing with other places in the United States on those other groups of factors,” Kaeding said.
Illinois just increased the its state corporate income tax from 5.25 percent to 7 percent. Neighboring Indiana, where Trump unveiled the plan Wednesday, has a rate of 6 percent, and it’s set to decrease a quarter of a percent every year until 2021.
Meanwhile, on other factors, Illinois is among the most expensive when it comes to workers compensation costs and property taxes.
Regardless, Kaeding said there’s a lot of work ahead to hash out more details of the federal plan, but in general it is a good starting point.
Another issue Kaeding said will get a lot of attention in Illinois is some Illinois counties wouldn’t be forced to subsidize high tax counties as they are now, if the proposed federal tax reform were to become law.
To cover the lost revenue from the decreased corporate and individual income tax rates, Kaeding said the proposal hints at eliminating state and local tax deductions. That would be good news for some Illinois counties, not others.
“About 32 percent of filers in the state of Illinois take advantage of this deduction,” Kaeding said, “but this deduction is skewed towards high-income earners in those high tax areas, in particularly Cook County and the surrounding suburbs.”
“So in essence what’s happening now is that individuals in Effingham County and other places downstate and other areas across the country are subsidizing the tax rates in the high income and high sales and high property tax areas of the country,” Kaeding said. “So Effingham county is in essence subsidizing the tax rates in Cook County.”
If the reforms were to become law, Kaeding said it would put pressure on high tax areas to revisit their tax code because the federal government wouldn’t subsidize it for them.