By Sarah Morgan
The federal government might be giving taxpayers a break with a temporary 2-percentage-point decrease in Social Security payroll taxes. But thanks to the biggest state budget shortfall in the nation, residents of Illinois will also be hit with a 2-percentage-point increase in state income taxes, as the Wall Street Journal reported.
Hiking the state’s income tax from 3% to 5% (that’s a flat rate for all individuals) amounts to a stunning 67% increase in the income tax rate.
For a family of four making $60,000 a year, that’s another $1,040 in taxes. For a family making $100,000, that’s another $1,840. But as bad as that sounds, this year, many residents won’t see much change in their overall tax burden, thanks to that temporary federal tax cut. But they’ll really feel it once the federal break disappears in 2012. At that point, they’ll see what is effectively a 4-percentage point jump in taxes over 2011.
Some Illinois residents might be scrambling for a loophole (if not a one-way ticket out of the state)–if there are any. Melissa Labant, a technical manager on the tax staff at the American Institute of Certified Public Accountants, says says Illinois residents should avoid trying to defer some income until the tax hike falls back to 3.75% in 2015, should reconsider. Federal tax rates are quite likely to rise substantially more than 2 percentage points in the future, so deferring income isn’t a good gamble right now, Labant says. Illinois residents can take comfort, however, in the fact that even with the increase, the state’s income tax is still one of the lowest in the country, and remain lower than what neighbors in Missouri and Wisconsin are paying, she says.
The state’s corporate tax rate is another story. At 4.8%, Illinois ranked 23rd on the Tax Foundation’s State Business Tax Climate Index for 2010. Raising that rate to 7% bumps the state down to 36th place, dropping it below Pennsylvania, Nebraska, Maine, Kansas, and Massachusetts. The tax increase will “severely impact” the state’s attractiveness to business (http://taxfoundation.org/publications/show/26965.html ), warned the Tax Foundation’s director of state projects, Joseph Henchman, and staff economist, Kail Padgitt.
It’s too soon to tell which, if any, states will follow Illinois’s lead, says Arturo Perez, a fiscal analyst for the National Conference of State Legislatures. “Take a step back and look at the state we’re talking about,” Perez says. Illinois’s budget gap was the largest in the country by a wide margin–at 47% of the general fund budget. The next-largest gap was Arizona’s, at a comparatively reasonable 9.7%.
Still, there are some clues in the numbers about which state’s residents would be most likely to feel the pinch next—and they won’t have the benefit of the payroll tax break if state hikes go into effect in 2012. This year, as states consider their 2012 budgets, 27 face shortfalls of greater than 5% of their general fund budgets, according to the NCSL. Nevada (32%), New Jersey (26%) and North Carolina (20%) have the biggest holes to fill. States will be trying to close these gaps with only a fraction of the federal stimulus funding that has been available for the past couple of years, Perez says – and having already tried a lot of short-term fixes like furloughing state employees. “At this point, the options for states don’t get easier, they only get harder,” he says.
One bit of good news for state number-crunchers that could mitigate the pain: other sources of tax revenues have already started to rise.
Readers, do you fear a state income tax hike?