Corporate income taxes have stifled Illinois’ pandemic recovery

Illinois has the third-highest corporate income taxes in the nation. These are some of the most harmful taxes to economic growth, particularly in times of economic hardship.

Illinois imposes the nation’s third-highest corporate income tax rate, which hurts economic growth and is contributing to Illinois seeing one of the slowest pandemic recoveries.

Illinois’ effective corporate income tax rate is 9.5%. It includes a 7% base tax and a 2.5% property replacement tax. These taxes stifle economic growth as they reduce funds businesses can invest in research and development, hiring or expansion. Because businesses can relocate more easily than individuals, high tax rates often give them incentives to move, taking jobs and tax revenue with them.

How Illinois got here

Illinois’ effective corporate income tax was 7.3% before 2011. That changed after the Great Recession, when the state raised its corporate income tax to 9.5% to cover budget shortfalls. The measure was sold as temporary. It wasn’t.

Rates were briefly cut to 7.75% in 2015, but continued budgetary constraints and mismanagement led to a budget impasse in 2017. Lawmakers eventually overrode Gov. Bruce Rauner’s veto and reinstated the 9.5% corporate income tax, where it remains today.

While Illinois was raising taxes, many states were moving in the opposite direction:

• Louisiana cut its tax from 7.5% to 5.5% in 2024.
• Nebraska is reducing its rate from 5.2% to 4% by 2027.
• Pennsylvania is reducing its rate from 10% to 5% by 2031.

These reductions follow a decades-long global trend towards lowering corporate income taxes to stimulate economic growth.

North Carolina

North Carolina shows why it’s smart to cut corporate income taxes. From 2013 to 2019 it lowered rates from 6.9% to 2.5% with plans to phase it out completely by 2030. This stands in sharp contrast to Illinois.

These changes had a strong impact on economic growth. In the five-year period before the reduction, North Carolina gross domestic product grew by only 6%, which lagged Illinois’ 9.3% growth and the national 12.1% growth. After reducing the tax, the states diverged. Illinois severely lagged the national average, growing only 5.7% from 2019 to 2024. North Carolina grew by 19.5%, outpacing national GDP growth.

Research confirms tax reform

Numerous studies have backed corporate tax cuts as a way to push economic growth. Research from the Organization for Economic Co-operation and Development has stated “corporate income taxes appear to be the least attractive choice from the perspective of raising GDP.”

The National Bureau of Economic Research has highlighted the particularly strong effect of corporate income taxes on economic recovery. Its study suggests a 1% cut in corporate taxes leads to a 0.2% rise in employment and a 0.3% rise in wage income.

This played out visibly in 2021 when firm migration hit a record high. States with low corporate income tax rates such as Florida, North Carolina, Nevada and Texas saw the highest influx of firms while New York, California and Illinois saw the largest declines. CBRE, a commercial real estate firm, also stated lower taxes were the single biggest reason for firms migrating.

Conclusion

Illinois’ high corporate income taxes have contributed to the state’s notably slow economic recovery. While the nation had a post-pandemic boom, Illinois has lagged – adding only 9,200 more jobs in the past five years, ranking 47th nationally in growth rate. Comparatively, North Carolina was ranked fifth having added 46 times more jobs than Illinois in the same period.

These harmful and inefficient tax policies stem from the state’s chronic mismanagement of its budget and short-term mindset focused on plugging budget deficits. The state could have reduced tax burdens when it received billions in federal pandemic aid but instead chose to increase annual expenditures by over $15 billion.

Adopting long-term reforms, such as those suggested in the Illinois Policy Institute’s Illinois Forward plan, can allow the state to use surpluses to lower corporate income taxes. This can help jumpstart economic growth by helping businesses thrive, provide opportunities for jobseekers both inside and outside the state and ultimately ease pressure on the Illinois budget.