Illinois business tax hikes undercut economic growth

Illinois business tax hikes undercut economic growth

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Despite positive surprises on the revenue side and imposing four taxes on businesses, Illinois lawmakers couldn’t balance the state budget for the 21st year in a row.

Included in the tax changes, the new budget decouples Illinois from the federal 100 percent bonus depreciation deduction.

By raising the cost of doing business in Illinois, the changes will lower personal income and could reduce opportunity for the state’s idled workers.

The COVID-19 economic shock did not hurt Illinois revenues as much as expected and then federal stimulus came to the rescue. Illinois collected more revenue in the 12 months since the pandemic began than it collected in the 12 months prior.

Illinois leaders could have used that revenue bump to make significant fiscal reforms for a brighter future. Instead, they imposed $655 million in new business taxes requested by Gov. J.B. Pritzker.

Illinois is among the slowest to recover job losses caused by COVID-19. Taxing new business investments in a state that is still reeling from the pandemic shock was a bad move, but it is harder to fathom how state leaders could see higher revenue, pass four business tax increases and still drop a budget containing at least a $482 million deficit. Then to add insult to that injury, state lawmakers gave themselves each a $1,200 raise, doubled their office allowances and added a bump for the governor’s office, too.

Raises are supposed to reward job performance. Here’s a closer look at the job Pritzker and lawmakers did on Illinois with the most impactful of those four new business taxes: a rollback of the Federal Tax Cut and Jobs Act’s 100 percent bonus depreciation deduction.

Reducing this tax write-off means cash-starved Illinois businesses will be denied the space necessary to invest and create new jobs.

That’s because “100 percent bonus depreciation” is a tax incentive that allows a business to immediately deduct the purchase price of eligible assets, such as machinery, rather than write them off during the life of those assets. The Tax Cuts and Jobs Act had doubled the bonus depreciation deduction for qualified depreciable property from 50 to 100 percent.

Before undertaking a costly investment, businesses consider whether the value of future cash flows from the investment will exceed the initial cost. Since 2017, the tax law changes have reduced the initial cost of new business investments by allowing businesses to deduct the full cost from their tax liability immediately rather than over several years.

Evidence from more than 2 million corporate tax returns shows bonus depreciation resulted in substantial increases in eligible new investments across the country. There was a 10.4 percent boost between 2001 and 2004—during an economic expansion—and then a much higher 16.9 percent boost during the Great Recession. The increase in investment also led to higher employment growth. The largest impact was among small firms because small firms with low cash holdings are highly responsive to a policy that immediately generates cash flows.

The policy means longer-lived assets will experience a larger change in the present value cost of investment. So bonus depreciation has larger effects for industries in which businesses invest more, on average, in longer-lived assets such as necessary buildings, machinery and other equipment.

It matters because fewer assets owned by Illinoisans will mean lower incomes for Illinoisans. The economy’s ability to increase its productive capacity by adding to its supply of capital, technology and workers will determine the size of Illinois’ economy.

For the past two decades, personal income grew less, the labor market underperformed relative to other states and the state’s population shrank. A policy that raises the cost of doing business in Illinois could harm the state’s economic performance.

A state such as Illinois that fails to keep up with increasing fiscal liabilities because of a shrinking tax base should do everything it can to be more competitive. State leaders just made it less so.

Crain’s contributor Orphe Divounguy is chief economist at the Illinois Policy Institute.

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