Federal tax reform is moving forward in Washington this week, and that's good news for the folks back home in Illinois. Done correctly, tax reform can spur economic growth, which means more jobs and better wages in Illinois and beyond.
But this reform effort includes a feature of above-average interest to state taxpayers: repeal of the deduction for state and local taxes. That deduction has served as a major incentive for state lawmakers to offset budget deficits with tax hike after tax hike. Remove the deduction, and lawmakers in Springfield will feel more pressure to rein in their excessive spending.
The congressional tax reform proposal is encouraging to those who want an America first tax system that leads to a stronger economy and wins the global competition for business and jobs.
For more than 30 years now, the U.S. tax code has made American businesses and the workers they employ less competitive than workers in other countries.
One of the biggest impediments to job creation and wage growth is the unusually high corporate income tax rate. The federal rate, currently topping out at 35 percent, is one of the highest in the world. That puts U.S. corporations at a tremendous competitive disadvantage and leaves their workers and investors — and the economy as a whole — worse off than they would fare under a more reasonable tax system.
The proposed tax reform would drive the corporate tax rate down to 20 percent. This is good news for workers, because most empirical studies estimate that workers bear between 75 percent and 100 percent of the corporate tax burden. In addition to putting money in workers' pockets, lower corporate taxes will boost business investment in the U.S. Those investments — whether they are used to upgrade worker skills, buy more efficient equipment or expand facilities — fuel business expansion and job creation.
The proposal would also allow American businesses to bring profits earned — and taxed — overseas back to the U.S. without having to pay additional taxes on them. Our current practice of double-taxing overseas earnings has led prominent Illinois firms, like Horizon Pharma — previously of Deerfield — to move their headquarters overseas. It's time to bring businesses like Horizon back home.
The tax reform proposal would also lighten the personal tax load borne by families and individuals. It doubles the standard deduction for individuals and dramatically streamlines and lowers most existing tax brackets.
One of the most important reforms for Illinois on the individual side of the tax code is the elimination of the state and local tax deduction.
This provision currently benefits only a small minority of Illinoisans: high-income taxpayers. Meanwhile, it creates a federal subsidy for the expansion of state and local bureaucracies. This deduction makes it eas-ier for the Legislature in Springfield to raise taxes to cover their budget deficits, rather than address the underlying spending problem.
This federal subsidy of tax-and-spend politics has helped Illinois attain a most undesirable status: the state with the fifth-highest tax burden in the country. It has also enabled Springfield lawmakers to avoid addressing the nation's worst pension crisis. And every year of avoidance just makes the crisis worse.
Tax reform will unleash a swell of economic growth, raising wages and creating new jobs for workers across the country. For Illinois, a more robust economy means more tax revenue for states and cities without having to raise tax rates. And the repeal of the state and local tax deduction means that Washington will no longer enable and incentivize the kind of profligate spending habits of Springfield and Chicago.
This piece originally appeared in The News-Gazette