Small Businesses in Illinois continue to face challenges with Franchise Tax

Small businesses in Illinois face numerous financial challenges, including having to pay an annual franchise tax. The franchise tax is actually three separate taxes, all based on paid-in capital. Paid-in capital is the money investors pay in return for their shares of stock. The paid-in capital is neither revenue nor net worth, it is the equity capital used to build a business.

Under the law in 2019, the annual and initial taxes required payments of a minimum of $25 and maximum of $2 million. Legislation advanced by the Republicans, passed by the General Assembly and signed by Gov. JB Pritzker in June 2019 called for phasing out the franchise tax, with total elimination of the tax by 2024. Unfortunately, in 2021, this legislation was repealed by the super majority. The three components of the franchise tax took $170 million out of employers’ pocketbooks in FY22, which amounted to 0.34 percent of general fund revenues.

The Small Business Burdens

The franchise tax is seen by most economists, including economists favorable to the public sector and its spending needs, as an archaic tax. Research shows that only 16 states currently impose a franchise tax, and of those at least two (Connecticut and Mississippi) are in the process of phasing out their taxes. Complying with franchise tax requirements in Illinois saddles small businesses that already have limited resources with more needless red tape. This tax can also put small businesses in Illinois at a competitive disadvantage compared to businesses in neighboring states due to higher operating costs, which in turn, can make it harder for small businesses to attract investment or retain talent. This is not what Illinois needs.

Illinois House Republicans have fought for the elimination of the franchise tax for many years, and it was on schedule to be eliminated by 2024, until the super majority broke the promise made in 2019 and took steps to re-establish the tax. House Republicans will continue to introduce legislation and fight to get this tax eliminated.

“We need to do more to help our small businesses succeed in Illinois,” said Rep. Coffey. “These small businesses are burdened by taxes while trying to attract new investments and keep their doors open.”

Read about other taxes that will dig into the pockets of Illinois families: