SPRINGFIELD — Illinois Republican lawmakers and businesses blame the state’ staggering economic recovery on income tax increases, but recent indicators suggest other factors are involved..

By Andrew Thomason and Anthony Brino

SPRINGFIELD — Illinois Republican lawmakers and businesses blame the state’ staggering economic recovery on income tax increases, but recent indicators suggest other factors are involved.

Since Illinois increased its corporate income tax by 46 percent from 4.8 percent to 7 percent this past year, several unexpected and expected changes occurred.

The number of limited liability companies, or LLCs, and corporations registered with the state actually increased, from 71,449 in fiscal 2010 to 73,130 in fiscal 2011, according to the Illinois Secretary of State.

The number of non-farming jobs increased by 1 percent, from 5.6 million in 2010 to 5.7 million in 2011, according to the Illinois Department of Employment Security.

And the state unemployment rate increased from 9 percent last January to 10 percent in November, the latest figure available. Meanwhile, the national unemployment rate dropped from 9.1 percent at the start of 2011 to 8.7 percent in November, a 4.3 percent decline.

Economic paradox

Recoveries usually create a paradoxical mix of economic figures, said Fred Giertz, an economist with the Institute of Government and Public Affairs at University of Illinois at Urbana-Champaign, who puts out a monthly index of the state’s fiscal health.

“To get the unemployment rate down, you don’t just have to create new jobs, you have to create enough jobs to absorb the number of people coming into the job market,” he said.

When unemployed people give up looking for jobs, they are no longer counted in unemployment figures. As the economy slowly improves and those people once again start looking for work, they can inflate the unemployment rate, Giertz said.

As far as higher taxes are concerned, Giertz pointed to the state’s fiscal health. Raising income taxes would have been a huge blow to businesses, if the state’s finances were healthy and robust, but since the state was on the verge of financial collapse, raising taxes wasn’t the worst decision.

Businesses don’t want to expand in a state that’s in dire fiscal straits, he said. Illinois’ deficit at one time approached $15 billion as the state’s skipped payments to vendors and spending outpaced income.

However, Todd Maisch, vice president of government relations for the Illinois Chamber of Commerce, the state’s largest business association, said the income tax increases have crippled economic recovery.

“To be honest, if you are really in a hard-hit industry, you’re probably operating at a loss and so you haven’t felt the impact,” Maisch said. “Probably the ones that were hit the hardest were those that were starting to come out of the recession and starting to turn a profit.”

Ripple effect

Rolling back the income tax increases could have a ripple effect.

Illinois House and Senate Republicans say the rollback would foster job creation by creating a more competitive business climate.

But a premature rollback could result in teachers, firefighters and police officers statewide being fired, said Kelly Kraft, Gov. Pat Quinn’s budget spokeswoman.

The tax increases, set to expire by the end of 2014, are estimated to bring in about $7 billion to the state’s coffers.

Tax tweaks

The GOP’s effort to roll back the taxes immediately has not gained traction in the Democratically controlled Legislature, and would require Quinn’s signature.

“Raising the income tax was the first of many difficult decisions,” said Rikeesah Phelon, a spokeswoman for state Senate President John Cullerton, D-Chicago. “It’s not clear that Republicans are willing to join us in making tough choices about cuts, old bills or revenue in the coming years. What is clear is that their call for a premature repeal of the temporary tax doesn’t get us any closer to solid financial footing.”

Even so, lawmakers have tweaked the year-old tax increase in response to some heavyweight companies’ threats.

The legislature passed a $250-million tax break package for businesses in December after CME Group, which owns the Chicago Board of Trade and the Chicago Mercantile Exchange, and the national retail company Sears Corp., threatened to leave the state.

CME Group and Sears will see annual tax breaks of about $100 million annually over the next decade.

Many Republicans said the legislation was “crony capitalism.”

Shortly after the package passed, GOP members of the Illinois House introduced legislation to roll back the corporate income tax rate from 7 percent to 6 percent, a 14 percent decrease, starting Jan. 1, 2013. On Jan. 1, 2014, the rate would return to 4.8 percent, an additional 20 percent reduction.

All told, the GOP legislation would cost the state about $4.8 billion in revenue.

House Republican Leader Tom Cross, R-Oswego, said his party’s plan would make up for the lost revenue by paving the way for more jobs, and thus more people paying the income tax.

Rolling back the tax increases “would send a good sign,” Maisch said. “But I believe that there is no one perfect answer. There still needs to be a re-engineering of state government, with pension reform at the top of the list.”

Giertz comes down between the claims of the business community that the state has lost a year of job creation and the Quinn administration’s claims that the income tax saved the state from certain doom.

“Illinois was in a really bad situation a year ago, and it’s still in a really bad situation now,” Giertz said. “It’s been kind of a wash.”

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