We can’t talk about the financial realities of running a small business without talking taxes. It is no secret that our taxes are high. What is the direct impact on businesses?
At the risk of over-simplifying things, government raises most revenue through three types of taxes. The federal government (IRS) collects a percent of our income (income tax). The state collects both income tax and a percent of our purchases (sales tax). County and local government raise money through sales tax and a percent of our property value (property tax). These three forms of taxation apply to both residents and businesses.
In Illinois, income tax of 3.75% on residents funds 45% of the annual budget. Income tax of 5.25% on corporations accounts for 8%. The Illinois sales tax rate is 6.25% funds 30% of state-generated revenue. The rest comes from other fees and special use taxes.
As consumers, we pay 10% sales tax because Cook County adds another 1.75% to the 6.25%. The Regional Transportation Agency adds 1.00% and village government adds 1.00%. These sales taxes apply to the end-consumer, whether that is a business or a resident.
In addition to sales tax, County and Village each raise the bulk of their funds from property tax. Property tax is a percent of the assessed value of the property which must be paid annually by the property owner. In every county except Cook, the calculation is pretty straightforward: the county figures out how much it needs and then apportions that pro rata based on property value. So, the owner of $1,000,000 property pays four times as much as the owner of a $250,000 property.
In Cook County, commercial property owners pay three times as much as residential owners on the same property value. This creates a huge tax bill for commercial property owners, but also puts our local businesses at a disadvantage to competitors in neighboring counties where both the consumer sales tax and the commercial property tax is significantly lower.
We’ll talk next week about why the unusual Cook County property tax structure leads to so many local mixed-use developments.