November Ballots in Arizona and Illinois Feature Big Proposed Tax Increases on Entrepreneurship and Small Business

By at 26 October, 2020, 11:17 am

by Raymond J. Keating-

When voting this year, citizens in two states – Arizona and Illinois – will be asked to increase taxes on individuals, families, entrepreneurs, small businesses and investors. Specifically, ballot measures in each state call for the imposition of higher income tax rates.

Let’s be clear, hiking income tax rates is never a good idea, especially if you’re concerned about investment, innovation, and economic, productivity, and income growth, and therefore, job growth as well.  But no matter which school of thought they happen to subscribe to, very few economists would seriously call for increasing taxes during a bad economy. Indeed, an ideal prescription for making a bad economy worse, or at best, for slowing or diminishing any economic recovery, would be to raise taxes during such times.

Hopefully, voters in Arizona and Illinois will understand these straightforward economic points better than those who put these measures on the ballot. By the way, the teachers union is behind the Arizona measure, claiming that any revenues gathered from higher taxes would be spent on public schools, while Governor J.B. Pritzker (D) in Illinois has been leading the charge for higher tax rates in that state.

Painful Tax Hikes In the Midst of a Pandemic  

As for the specifics, Proposition 208 in Arizona, if approved by voters, would increase the state’s top personal income tax rate from 4.5 percent to 8 percent – a 78 percent increase in the rate – applied to incomes of more than $250,000 for single payers and $500,000 for those filing jointly.

In Illinois, the ballot measure would eliminate the state constitutional protection that prohibits a graduated income tax. If voters approve this measure (60 percent is required for approval), state legislators already have passed tax increases that would go into effect in 2021. As for the personal income tax, the current flat rate of 4.95 percent would be replaced by a graduated income tax with rates ranging from 4.75 percent to 7.99 percent. In addition, the corporate income tax would increase from 7 percent to 7.99 percent. But that is only the base rate, as there is an additional personal property replacement tax of 2.5 percent. So, the total corporate tax rate would increase from 9.5 percent to 10.49 percent, making it the second highest state corporate tax rate among the states.

In each case, these tax increases would apply to small business, given that most businesses are S-Corps, LLCs, sole proprietorships and partnerships, and pay the personal income tax. For good measure, there is an added 1.5 percent personal property replacement income tax in Illinois for S-Corps and partnership, which means that the top rate for pass-through businesses would increase from 6.25 percent to 9.49 percent. Again, that would be one of the highest rates among the states.

According to a study from the Goldwater Institute, it was found: “Fifty percent of those whose tax rates will be directly targeted will be small business owners. These individuals represent thousands of job creators and will bear a disproportionate load from … price tag.”

Also, in each case, the individual capital gains tax rate would rise as well. In Illinois, there is no differential for capital gains, so the top individual capital gains tax rate would increase from 4.75 percent to 7.99 percent.

Arizona has a partial capital gains exclusion, with that exclusion remaining in effect, the top capital gains tax rate would rise from 3.405 percent to 6 percent.

When one understands that investment is crucial for business startups and expansions, the ills of raising capital gains taxes – thereby reducing the potential returns on the uncertain, high-risk undertaking of investing in businesses – become obvious, with higher capital gains taxes undermining entrepreneurship and therefore growth.

As the entire nation struggles to emerge from the woes of this pandemic economy, tax increases – at the federal, state or local levels – would serve as serious further impediments to recovery and growth. Let’s hope that voters in Arizona and Illinois send a strong message that tax increases are off the table.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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