By Christopher Gillock
The national news coming from Springfield, Illinois over the past couple of weeks has focused on the income tax increase – the drama behind the override of Governor Rauner’s veto, the increase in the personal tax rate to 4.95% (from 3.75%) and the increase in the business tax rate to 7% (from 5.25%). Illinois has a budget for the first time in 2 years. The problem isn’t solved at all of course, but at least we we have a budget and some of the smaller programs directed at vulnerable populations can start up again. This big story has sucked up all the media oxygen, but there is another tax story unfolding – the Illinois “Privilege Tax.”
To be honest, I haven’t been paying much attention to the details of what is going on in Springfield – shame on me. Folks with a “dog in the fight” (aka private equity professionals) are incensed that a bill has been passed by the Senate to impose a 20% “privilege tax” on carried interest income earned by investment managers. Illinois would be the only state to have such a tax – even California and “Taxachusettes” don’t impose a tax like this. If this becomes law, every PE firm in Illinois will leave – Texas has another great opportunity to increase its share of PE firms. You can’t lead the nation on an industry -specific tax and expect to have that industry remain in your state.
Illinois is attacking one of the most mobile industries in existence – all these folks need is a high-speed internet connection, a telephone and an airport. Illinois will end up losing revenue, because the rich PE dudes and dude-ettes will cease to be Illinois residents – no “privilege tax” and no income tax from those people. This is really a bad idea. Apparently the Illinois House hasn’t voted on the bill yet yet, and I can’t believe Rauner would sign it. I presume that it will eventually die, but weird stuff happens in Springfield. And the legislature was able to “turn” enough Republicans to override Rauner’s veto on the tax increase.
I had lunch with a partner in a private equity firm today and this was his first topic of conversation. He is getting fitted for his Dallas Cowboys jersey.