When Government Shoots You In the Back

The Illinois tech community is doing great.  I see all kinds of really interesting businesses that are building.  I am invested in a few.  They are solving problems and creating value for customers.  Someday, they will be big.  In the last five years, venture backed Chicago based companies have had $23.5B in exits.  Things are really looking up.

Recently, the state of Illinois said they were going to regulate Bitcoin lightly.  That’s a good thing.  Illinois, and the city of Chicago are highly regulated.   It needs to change.

If you follow the news, you know that governments in Illinois are in trouble.  Every government entity in Illinois has pension trouble.  Massive pension liabilities that stretch from here to the moon.  The budget deficits because of government spending are huge.  There are few bidders for Illinois municipal bonds and interest rates are going up because there is a lot of risk holding them.  It’s unsustainable.

However, Illinois is also gerrymandered.  Democrats run the state.  They have run Chicago and Cook County since the 30’s.  Even with a Republican governor, there is little Republicans can do.  They don’t want nobody nobody sent.

So far, the answer has been higher fees and taxes. Chicago raised all kinds of fees on amusement, cable tv, and instituted the infamous cloud tax.  The cloud tax was the first of its kind anywhere.  They also raised property taxes which are the highest in the country.

Illinois lost 37,000 residents last year.

Yesterday in the Illinois Senate, the Democrats introduced an Omnibus Tax Bill, or SB 9.  Let’s hope Governor Bruce Rauner vetoes it and they don’t have the votes for an override.  Here are the particulars.

This afternoon Sen. Hutchinson filed new language to SB 9, otherwise known as the Senate’s revenue omnibus bill. SB 9 is part of package of 13 bills that is currently making its way through the Illinois General Assembly. There are several new components laid out in Senate Amendment No. 1 to SB 9 that are worth mentioning to the Illinois business community. 

Under Senate Amendment No. 1, the new provisions include: 

  • Removal of the soda tax and is replaced by the Business Opportunity Tax Act (see below). This tax is a tax imposed on businesses based on the number of Illinois employees of the business.
  • Raises corporate income tax rate to 7% and personal income tax rate to 4.99%.
  • Establishes the following service taxes; storage services, amusements, repair and maintenance services, landscaping services, and laundry and dry-cleaning services. 
  • Establish a tax on cable television services and direct broadcast satellite services.
  • Decouples from the Domestic Production Activities Deduction.
  • Eliminates the unitary business noncombination rule.
  • Makes the research and development credit permanent. 
  • Redefines manufacturing to include graphic arts production and includes items formerly included in the manufacturers purchase credit in the manufacturing machinery and equipment exemption. 
  • Provides that False Claims Act cases may not be brought with respect to any taxes imposed, collected, or administered by the State of Illinois.
  • Repeals the Adult Entertainment Tax effective January 1, 2018. 
  • Modifies pollution control facilities valuation under the Property Tax Code.

The Business Opportunity Tax Act applies to foreign and domestic companies.  The fine print reads like this:

(1) if the taxpayer’s total Illinois payroll for the taxable year is less than $100,000, then annual tax is $225;

(2) if the taxpayer’s total Illinois payroll for the taxable year is $100,000 or more but less than $250,000, then the annual tax is $750;

(3) if the taxpayer’s total Illinois payroll for the taxable year is $250,000 or more but less than $500,000, then the annual tax is $3,750;

(4) if the taxpayer’s total Illinois payroll for the taxable year is $500,000 or more but less than $1,500,000, then the annual tax is $7,500; and

(5) if the taxpayer’s total Illinois payroll for the taxable year is $1,500,000 or more, then the annual tax is$15,000.

If you are a startup, you are affected by this tax.  Most startups I know about will get hit at levels 3,4, and 5.  Of course, most startups don’t have net income, so they are unaffected by the corporate tax rate.  But, their employees will feel the sting of the 4.99% income tax rate along with all the other taxes.

Can anyone enlighten me?  Do other tech communities have to bear the burden of an employment tax like this? Does California do this?  NY?  Massachusetts? Colorado? Surely Texas doesn’t-although Texas has some high property taxes.

As far as personal income taxes, here are what neighboring states are up to.  All are higher except Indiana and Michigan.  But, all in tax costs are significantly lower when you add in sales taxes, property taxes, user fees and other costs.  If this bill passes into law, the river of residents leaving the state for places like Indiana, Tennessee, Texas, and Florida will become a flood.  People tell me Nashville is full of Chicago sports jerseys and so is Austin, TX.  There is a Cubs bar on 6th Street.

Last evening, I was at 1871 to hear about the FIS Venture Center financial accelerator.  They are accepting applications. When we were down there last August the Arkansas Governor came to demo day.  Arkansas has passed an aggressive tax credit for startups. If you invest in a startup based in Arkansas, you get a massive tax credit that you can sell.  Illinois has a small angel tax credit.  It’s great, but it’s non-transferrable.  I am not moving to Little Rock anytime soon but it shows you how aggressive state governments are getting when it comes to startups.

Deskpass CEO Sam Rosen wrote about the people leaving the state yesterday.  He’s seeing it happen.  It’s sad.

 

  • awaldstein

    Good stuff.

    I read this blog most attentively when you represent your community in Chicago and draw the big picture of culture, lays, taxes and small businesses.

    Thanks!

    • Unfortunately, government officials are more concerned with preserving their own patronage and power bases than they are citizens. If you want to know how Illinois works, I strongly urge you to stream the movie michaelmadigan.com. Any lover of good government from either party should have their stomach turning by the end.

  • Dan Kunze

    If this goes through the first thing I will do is contact my attorney and re-incorporate my business in Wisconsin. $15k/year buys a lot of attorney time.