The Illinois enterprise tax hike is undermining financial progress

Despite positive surprises on the revenue side and the imposition of four taxes on companies, Illinois lawmakers failed to balance the state budget for the 21st straight year.

Included in the tax changes, the new budget decouples Illinois from the federal 100 percent bonus write-off deduction.

By increasing the cost of doing business in Illinois, the changes will lower personal incomes and could reduce opportunities for the state's unemployed workers.

The economic shock from COVID-19 didn't hurt Illinois revenue as much as expected, and then state incentives came to the rescue. Illinois has had more revenue in the 12 months since the pandemic began than in the previous 12 months.

Illinois leaders could have used this revenue increase to make significant tax reforms for a better future. Instead, they collected $ 655 million in new corporate taxes passed by Governor J.B. Pritzker were requested.

Illinois is among the slowest countries to recover from job losses caused by COVID-19. Taxing new business investment in a state still suffering from the pandemic shock was a bad move, but it's harder to see how leaders generate higher revenues, pass four corporate tax hikes, and still have a budget of at least $ 482 million. Dollars could lower deficit. To add insult to injury, state lawmakers gave each other a raise of $ 1,200 each, doubled their office allowances, and also added a raise for the governor's office.

Salary increases are intended to reward work performance. Here's a closer look at the work Pritzker and Illinois lawmakers have done with the most powerful of these four new corporate taxes: a withdrawal of the Federal Tax Cut and Jobs Act's 100 percent bonus depreciation allowance.

Reducing this tax write-off means that Illinois businesses that are suffering from lack of funds are deprived of the space they need to invest and create new jobs.

This is because the "100 percent bonus write-off" is a tax incentive that allows a company to immediately deduct the purchase price of eligible assets such as machinery rather than depreciating them over the life of those assets. The Tax Cuts and Jobs Act had doubled the bonus depreciation allowance for qualifying depreciable real estate from 50 percent to 100 percent.

Before making a costly investment, companies consider whether the value of future cash flows from the investment will exceed cost. Since 2017, the tax law changes have reduced the cost of new business investments by giving companies the ability to deduct the full cost from their tax liability immediately and not over several years.

More than 2 million corporate tax returns show that the bonus write-off has resulted in a significant increase in eligible new investments across the country. Between 2001 and 2004 there was a 10.4 percent increase – during an economic expansion – and then a much larger increase of 16.9 percent during the Great Recession. The increase in investment also led to higher employment growth. The biggest impact has been seen with small businesses, as small businesses with low cash holdings are very quick to respond to a policy that generates instant cash flows.

The policy means that longer-lived assets will see a larger change in the present value cost of the investment. So bonus write-off has greater implications for industries where, on average, companies invest more in more durable assets such as necessary buildings, machinery, and other equipment.

It is important because fewer Illinois-owned assets mean lower Illinois incomes. The ability of the economy to increase its production capacity by increasing the supply of capital, technology and labor will determine the size of the Illinois economy.

Over the past two decades, personal income has grown less, the labor market has underperformed other states, and the state's population has shrunk. Policies that increase the cost of doing business in Illinois could hurt the state's economic performance.

A state like Illinois, which is unable to keep pace with rising tax liabilities due to a shrinking tax base, should do everything it can to become more competitive. State leaders just did it less.

Crain's associate, Orphe Divounguy, is the chief economist at the Illinois Policy Institute.