Illinois Nearing a Tax Deal?

The state of Illinois is allegedly close to a deal to nearly double its income tax, from 3% to 5.25%.  In a separate action, it's also passed a law allowing it to collect sales tax from any online vendor (read: Amazon) with affiliates in the state.


The latter law doesn't make much sense to me.  It is a cause near and dear to the hearts of state legislators everywhere, but so far the only effect has been to embroil states in endless litigation, while causing Amazon (and for all I know, other online retailers) to cut off its affiliates in the states that have tried it.  The affiliate businesses are making a lot of noise about all the jobs that will be lost, but this is highly exaggerated; almost definitionally, businesses that make the bulk of their revenue off of Amazon referrals, don't employ that many people.  But if it won't cost many jobs, it's hard to see how it raises revenue, either; Amazon will terminate its Illinois affiliates, causing the bigger businesses to move across the border to another state, while the smaller businesses simply lose taxable revenue.

The income tax increases, on the other hand, are both workable and necessary.  Conservatives will holler, but Illinois is not going to eliminate its entire deficit by cutting spending; the cuts needed too deep, the citizenry dependent on the services.  Whether or not you think these programs should exist, they do now, and you can't simply throw people off who planned their lives around them.

Perhaps predictibly, the income tax increase will be harder to pass.  The incoming governor has promised to veto any law that raises taxes by more than one percentage point, and it's not entirely clear that he's changed his mind.  And of course, citizens who have their taxes increased just as their income is the most threatened are going to freak out.

As I noted in my recent column on the state budget crisis, a recession is the worst possible time to raise taxes or cut spending.  But Illinois is going to have to do both, and soon.  It will be better for everyone--even the taxpayers--if this tax deal passes and they finally start to get the fiscal problems under control.




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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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