January 13, 2011

Understanding the State Income Tax Increase

On January 12, 2011, the Illinois General Assembly approved Senate Bill 2505, which includes an income tax increase. The bill includes temporary rate increases to the individual and corporate income tax, as well as a permanent 0.25 percentage point increase to the individual income tax. Under current law, the individual income tax rate is 3 percent and the corporate income tax rate is 4.8 percent.

Municipalities and counties receive 10 percent of income tax revenue, after a portion is put in the Income Tax Refund Fund. Under the new bill, local governments will not receive any additional revenue generated from the rate increase. Instead, the bill attempts to keep revenue disbursements to local governments at the current amount by reducing the percentage disbursed. Local governments will receive 10 percent of the ratio of the current rate to the new rate (e.g. 10% of 3%/5% = 6%). The following table provides a summary of the changes.

  • The bill includes state spending limitations for fiscal years 2012, 2013, 2014, and 2015, which run July 1 to June 30. The bill provides a specific dollar amount for each fiscal year. FY2012 includes a $36.818 billion spending limitation, which is 9.9 percent higher than the $33.502 billion in state spending enacted for FY2011. The spending limitations increase annually by 2.0 percent.
  • Starting February 1, 2015, the 0.25 percentage point permanent increase in the individual income tax will go to special funds: half to the Fund for the Advancement of Education and half to the Commitment to Human Services Fund.

The new income tax disbursement rates were set to maintain revenue sharing at the current level. There are a few provisions in the bill that may affect disbursements. The spending limits for FY2012 through FY2015 include all state appropriations and statutory transfers from the state general funds. If the spending limit is exceeded, the individual and corporate income tax rates permanently revert to 3.0 percent and 4.8 percent. However, local governments' share of the tax would not revert to 10 percent. Instead, it would remain at 6 percent for the Individual Income Tax (IIT) and 6.86 percent for the Corporate Income Tax (CIT).

In addition, the bill attempts to keep local governments' share of the income tax at current levels by reducing the percentage disbursed from the total revenue collected. To the extent that the increase in the tax rates do not result in proportionate increases in revenues collected, local governments could receive less revenue than they otherwise would have under current law.