CHICAGO (Sept. 29, 2026) —  Over the past decade, Illinois’ economy grew less than half as fast as the U.S. economy.

The state’s economic challenges are connected to a tax code that is too high, inefficient and poorly designed, according to a new report from the Illinois Policy Institute. The institute found that Illinois can combat outmigration and attract new jobs by improving its tax code with 10 reforms to enhance the state’s tax competitiveness.

“Taxes touch virtually every aspect of our economic lives. They influence where we live, what we do and what we buy. But Illinois’ tax code constrains Illinois’ economic opportunities with its combination of a high tax burden and a poor tax structure,” said Jared Walczak, senior fellow at the Illinois Policy Institute and report author.“Improving Illinois and making the state a destination for businesses and families alike can be done with simple but meaningful changes to the tax code.”

Ten ways to improve Illinois’ tax code:

• Eliminate the throwback rule. Illinois’ formula for determining business taxes leads to higher taxes for some businesses, especially small manufacturers, to serve out-of-state customers.
• Allow first-year expensing for machinery and equipment, as is the case with other expenses. Businesses should be allowed to deduct the full cost of equipment when they make a purchase, instead of spreading the deduction over years.
• Review economic development incentives. Lawmakers should end ineffective tax credits and reform others, freeing revenue for broader tax relief rather than benefits limited to selected companies.
• Repeal the tax on net controlled foreign corporation-tested income rules.Illinois framework does not account for taxes paid abroad like the federal tax code and raises costs for businesses and consumers.
• Permanently remove the cap on net-operating-loss deductions. Businesses should be able to deduct all losses from one year against profits in another, helping prevent unusually high effective tax rates and easing the burden on startups in particular.
• Repeal the corporate franchise tax. Illinois unnecessarily requires all businesses in the state to pay to calculate this tax burden that the vast majority don’t meet. In 2022, more than 342,000 Illinois businesses filed and only roughly 40,500 ended up owing the tax.
• Modernize the sales tax base. Illinois applies a 6.25% sales tax at the state level, and it excludes purchases from an increasingly service-based economy. Illinois should distribute the tax evenly across service-based industries and reduce the overall rate to 5.25%.
• Repeal the estate tax. High-income households retiring outside Illinois costs the state economic activity and other late-life tax revenue.
• Strengthen property tax levy limits. Remove exceptions and restrictions that have weakened existing limits so they can do more to restrain the growth of property tax bills.
• Reform unemployment insurance taxes. Better align employers’ tax costs with their use of the unemployment system and the goal of keeping people employed.

Illinois lost nearly 943,000 residents and $87.8 billion in adjusted gross income on net to other states over the past decade, the institute found. Lower-tax environments and the cost of living in other states can make incomes stretch further. Even though Illinoisans earn about $12,000 more per capita than Indiana residents, after-tax take-home pay is only about $4,000 higher in Illinois compared to Indiana after adjusting for cost of living, and that gap is shrinking. Illinois’ weak economic growth, population losses and business formation rates compound the state’s challenges.

“People are leaving Illinois for low-tax states that give them more economic flexibility. While Illinois cannot change its tax burden overnight, these policies should be a blueprint for lawmakers on how to encourage — and not punish  — investment, startups and job creation in the state,” said Bryce Hill, senior director of fiscal and economic analysis. 

To read “Taxed out: 10 reforms to stop Illinois from losing people and jobs” visit, illin.is/taxed-out.

For bookings or interviews, contact media@illinoispolicy.org or (312) 607-4977.