Illinois has become infamous for encouraging cronyism and discouraging entrepreneurship, but there are a number of steps state lawmakers could take to end this cycle and encourage growth.
Without serious changes, Illinois will continue on a cycle of job loss and economic decline.
According to the Kauffman Foundation, Illinois ranks near the bottom for entrepreneurial activity in the U.S. And Chicago is one of the least friendly cities, with the third-lowest rate of entrepreneurship of all major U.S. cities.
Small businesses in Illinois feel the burden of government. That’s why they’ve given the state an F for business friendliness.
However, big businesses are regularly exempted from the state’s biggest taxes through special tax deals. These crony carve-outs have accelerated since the 2011 income-tax hike.
Illinois’ tax burden is increasingly shouldered by the little guy who can’t access the crony deals that are doled out through the Department of Commerce and Economic Opportunity, or DCEO.
What the little guy does get, however, is a set of special taxes for job creators. Illinois imposes harmful franchise taxes, death taxes and Limited Liability Company fees on entrepreneurs. These taxes hit them at the worst possible time: right when they get started as business owners.
The contrast is obvious. Corporations with political clout get special deals. The little guy shoulders the weight of the regular tax burden, then gets whacked with special taxes.
State government needs to go to work for the entrepreneurs and small business owners who are pushing the state forward. Otherwise, the next generation of business leaders will continue leaving Illinois.
1) Sunset the 2011 income-tax hike. The historic 2011 income tax hike has had a devastating effect on job creation in Illinois. The tax increase has been borne by small businesses and families who don’t get special deals.
Politicians promised that the 2011 tax hike was temporary. The state’s credibility is on the line, and Illinois needs to keep its promise to taxpayers.
2) Repeal the death tax. Illinois is one of only four states in the Midwest to impose a death tax. The death tax drives business owners and wealthy residents out of state. It also hurts farmers who want to keep their land in their family.
In Illinois, small business owners who inherit a business or farm must immediately sell off a chunk of their new assets to pay the death tax. This is the worst possible way for the state to welcome them as new business owners.
3) Repeal the franchise tax. The franchise tax is a tax on business assets and investments in Illinois. Businesses pay this tax just for the privilege of setting up in Illinois. Then they must continue to pay the franchise tax every year, based on their assets in the state. The tax assessment goes up if the business grows its asset base in the state.
The state simply takes away a business’ assets each year. Here’s the kicker: businesses pay this tax whether or not they make any money in a given year. The tax simply encourages businesses to move their assets out of Illinois.
The formula for assessing the franchise tax liability is complicated, the tax is economically harmful, and it drives out-migration. Illinois should repeal the franchise tax.
4) Slash LLC fees by 90 percent. Illinois has the second-highest LLC fee rates in the country, far out of line with neighboring states. In Illinois, it costs $500 just to file paperwork to create an LLC, and then $250 per year to file an annual report with the state.
There is no reason for the state to take this amount of money from entrepreneurs who want to create jobs. The state collects approximately $70 million in LLC fees each year, and causes tremendous damage to the state’s low-income entrepreneurs.
5) End DCEO cronyism. The DCEO gets $500 million in state dollars, which it uses on crony deals. Hundreds of millions of dollars in grants and tax incentives are doled out through the DCEO, and these primarily benefit larger players and the politically connected.
Eliminating the $500 million in state funding for DCEO would allow Illinois to eliminate the death tax, franchise tax, and slash LLC fees without impacting the budget.
6) Create alternatives to occupational licensing. Occupational licensing requirements are huge hurdles for poor people who simply want to go to work for themselves. There are 35 low-income occupations in Illinois that require burdensome licensing. Many of the licensing requirements keep poor people out of work and dependent upon government.
One simple example is barbers. Illinois law mandates at least nine months of class, consisting of 1,500 class hours and $20,000 in tuition, simply to cut hair. Hair braiders in Illinois are required to attend classes that aren’t offered anywhere in Illinois.
For low-income professions outside of medicine and law, the state should allow poor people to simply register their chosen occupation, assume the risks involved and get to work.
7) Allow small businesses to crowdfund. Crowdfunding, an investment revolution is sweeping the country, but Illinois is sitting on the sidelines. More than 12 states, including Wisconsin and Indiana, have created a crowdfunding exemption to allow entrepreneurs to raise money by crowdfunding.
Creating a crowdfunding exemption would allow local businesses to raise local dollars by selling debt and equity online, in the same way that kickstarter.com raises funds for good causes. Crowdfunding means creative investment, new businesses and more jobs. Illinois should embrace crowdfunding.
Illinois’ problem is that state officials act as if entrepreneurs don’t matter and the economy grows when bureaucrats make special deals with big business.
That’s wrong. Job creation is driven by entrepreneurship. It’s time for Illinois lawmakers to tip their hats to the state’s entrepreneurs, and fix the legal code that holds them back.