A progressive income tax would hit Illinois’ businesses community hard. That’s because S corporations and most partnerships “pass-through” their income to the individual owners of those businesses, meaning their profits are taxed at the state’s personal income tax rate.
That’s on top of the 1.5 percent replacement tax these businesses pay.
State Sen. Don Harmon claimed that his progressive tax structure, with a top rate of 6.9 percent on income over $180,000, would affect relatively few of these businesses. But what Harmon isn’t telling taxpayers is that a vast majority of income earned by pass-through businesses – almost all of it – would be taxed at a higher rate under his proposal.
The Internal Revenue Service publishes detailed information about the sources of income on Illinoisans’ tax returns, most recently from 2011. The IRS data show that 77 percent of the returns claiming partnership or S corporation income are on returns with an adjusted gross, or AGI, of less than $200,000.
But when we look at the total amounts of this business income from all returns, the percentages turn around: The net income coming from returns of more than $200,000 accounts for 99 percent of the total.
That means a progressive income tax would take more profits from businesses right when they start making enough to begin reinvesting those profits to grow their businesses and hire on a greater scale.
In a recent interview, Illinois small business owner Dennis Rieken explains why higher income tax rates would harm Illinois business. Dennis owns and operates Dick Van Dyke Appliance World, which has several locations throughout central Illinois.
“Jobs are created because businesses grow and expand,” Rieken said. “The thing that causes that is profit. Profit is not a dirty word, it’s what causes prosperity. When governments take that profit through taxation – take more and more profit away from a company – they can’t expand, they can’t grow, they can’t hire more people.”
Dennis’ statement hit the nail on the head. What Don Harmon and other progressive tax advocates are failing to do is connect dollars to jobs. Taking more from pass-through businesses as they start to earn more means there’s less room in the budget to grow and expand the businesses. And in a state with more than 1 million people unemployed or underemployed, the last thing Illinois needs is a tax structure that prevents businesses from growing and creating jobs.