S Corp Member Alert! Governor Blagojevich proposed last month to replace the Illinois state corporate income tax with a gross receipts tax (GRT). Under the current proposal, the state’s current 4.8% corporate income tax rate would be phased out over four years and the new GRT would be imposed on all revenues realized by IL businesses from the sale of good and services – .85% for goods and 1.95% for services. The change will increase projected annual revenue collections more than four-fold and has been characterized by the non-partisan Tax Foundation as the largest state tax increase this decade.

A massive tax increase is bad enough. But a gross receipts tax? These taxes are considered to be the most economically damaging of all taxes. As the Tax Foundation observed:

    The new tax would be problematic not only because of the additional tax burden it would impose, but also because of the way in which it would do so. Gross receipts taxes are one of the most economically damaging ways for states to extract revenue, and economists from all ends of the political spectrum are nearly unanimous in their opposition to them.

As bad as gross receipts tests are, the reasoning behind the increase is worse. Apparently, the Governor is concerned that corporate taxpayers in Illinois have seen their share of total tax burden decline over the past three decades, from about one dollar in five to one dollar in seven. Why? Because of the dramatic growth of pass-through businesses like S corporations. According to the Governor’s office, the reported number of limited partnerships, limited liability companies and S corporations grew from 94,000 in 1984 to 285,000 in 2004.

The Governor looked at the data and decided that Illinois businesses weren’t shouldering their fair share.

But S corporations (and partnerships) pay plenty of tax. They just pay through the individual income tax rather than the corporate tax. This reality has the effect of reducing measured corporate income taxes and increasing tax collections on individuals and families, making it look like businesses are paying less tax than they are.

Moreover, if the GRT is enacted, Illinois S corporation owners will still be expected to pay the 3 percent tax on their business income imposed by the state’s individual income tax. This double tax effectively puts S corporations at a disadvantage relative to traditional C corporations in Illinois, and is patently unfair.

We will keep you updated as we learn more. If you have a business in Illinois, let us know. We’ll help you fight this unwise and unfair tax increase on Illinois businesses.