Governor Pritzker’s Tax Proposal – What You Need to Know

In March of this year, information was released regarding Illinois Governor JB Pritzker’s proposed tax plan, otherwise known as the “Fair Tax for Illinois.”  There are a number of items in this proposal which, should this become law, could impact both individual and corporate taxpayers in the state of Illinois.  Here are a few of the key items contained in the proposal:

Individual Changes

Tax System Structure:  The current income tax structure in Illinois is a flat tax, meaning income is taxed at one rate (currently 4.95%) regardless of income level.  Governor Pritzker’s tax proposal would change this to a tiered structure (similar to Federal taxation), meaning the more income you make, the higher your income tax rate would be.

Getting such a tiered structure implemented will require amending the constitution of Illinois, which currently prohibits a graduated income tax rate structure.  Governor Pritzker and Democratic state legislators who back a graduated income tax hope to act on the issue before the General Assembly adjourns at the end of May. Lawmakers would need to pass a bill setting new tax rates, and three-fifths majorities in each chamber would have to approve an amendment to eliminate the state constitution’s flat tax requirement. Before anything could take effect, voters would also have to approve the amendment, which can’t happen until November 2020 at the earliest.  Recently, the Senate Committee approved the graduated rate structure and filed a few amendments.  Here is some information on the proposal:

Individual Tax Rates:  The proposal includes six different tax rates.  Here are the proposed brackets and rates under Governor Pritzker’s tax plan:

It should be noted that Governor Pritzker’s tax brackets and rates do not differ for single and married filers.  As mentioned earlier, the Senate Committee recently approved a graduated rate system, but filed different rates in an amendment:

As you can see, taxpayers with income of $250,000 and under would essentially see no change to their tax situation.  However, income above this amount would be subject to rates much higher than under current law.  Further, there is a “cliff” at the top rate.  When taxpayers hit the top income brackets, the benefit of the graduated rate schedule is lost and a flat-tax at the highest rate is triggered.

Another item of note in Governor Pritzker’s proposal is an increase in the property tax credit from 5% to 6% for real estate taxes paid on a primary residence.

Corporate Changes

Corporate Tax Rate:  On the corporate side, Governor Pritzker’s tax plan would effectively increase the rate on C Corporation income to 10.45%, the third-highest in the country.  This 10.45% rate is comprised of two pieces – an increase from 7% to 7.95% on the base corporate tax rate, plus the 2.50% replacement tax that C Corporations are subject to.

The recent Senate Committee amendment contains a slight increase from Governor Pritzker’s plan, moving the corporate rate from 7% up to 7.99%.  So, the all-in rate applied to C Corporations would be 10.49% (7.99% Senate proposed rate, plus the 2.5% replacement tax).

Pass-through Tax Rate:  According to Governor Pritzker’s tax plan, pass-through structures (non-C Corporations) would be taxed at an effective rate of 9.45% (fourth-highest nationwide), as the replacement tax for non-C Corporations is 1.5% as opposed to 2.5%, plus the top individual tax rate of 7.95%.

As mentioned above, the Senate Committee’s slightly higher proposal of 7.99% would cause non-C Corporations to be taxed at an effective rate of 9.49% (7.99% Senate proposed rate, plus 1.5% replacement tax on non-C Corporations).

Whether or not Governor Pritzker’s proposal, in its current form or otherwise, actually turns into law remains to be seen, but there is certainly a chance reform gets done at some point.  If you have any questions on anything contained in this blog, please reach out to your BDF team.