Northern Illinois Patriots

http://online.wsj.com/article/SB10001424052748704803604576078291454012106

By ILAN BRAT

Governors of some nearby states said they would try to take advantage of the passage of substantial corporate-tax increases in Illinois and some local manufacturers said they were disappointed in the outcome.

On Wednesday, the Illinois Senate approved an increase in the state's corporate-tax rate to 7% from 4.8%, part of a broader tax package that was passed by the state House on Tuesday.

Associated Press

Democrat state Sen. John Cullerton watches the debate.

If Gov. Pat Quinn signs the measure into law, as he is expected to do in coming days, it would bring the total percentage tax that Illinois corporations would pay on income, including a separate personal property replacement tax, to 9.5%, one of the highest in the nation, according the Tax Foundation, a conservative-leaning Washington research outfit.

The tax package, aimed at digging Illinois out of a $13 billion deficit, also raises the individual income-tax rate to 5% from 3%. The measure failed to win over a single member of the legislature's Republican minority, who said it would hurt economic growth and working families.

Iowa has the highest state corporate-tax rate, at 12%, but state law allows its companies to deduct their federal income taxes from their state liability. That provision substantially brings down Iowa's state rate, said Scott Hodge, president of the foundation.

The increases would make the corporate income-tax burden in Illinois the third-highest in the country when combined with an assumed 35% federal corporate income tax, following Pennsylvania and Minnesota, according to the foundation's figures. Illinois currently ranks 21.

"While Illinois is raising its business taxes, states such as Minnesota and Iowa and others are looking to cut their corporate taxes," Mr. Hodge said.

Ron Bullock, an owner of Bison Gear & Engineering Corp., of St. Charles, Ill., which makes motors used in commercial machinery, said he was "extremely livid" that Illinois decided to raise taxes without cutting any broad spending, as he had to do when his sales dropped 20% in 2009. The tax increases would raise his costs and hurt his ability to reinvest in his business, he said.

"Our customers are not going to want to hear that we're going to have to increase our prices because the state of Illinois is taxing us at a higher rate," he said. "We're just going to have to eat it, unfortunately."

He added that should his company need to expand he was "going to be looking really hard outside of Illinois."

In addition to raising the corporate-tax rate, the Illinois legislature also changed some other tax provisions that affect companies, said Mark Denzler, chief operating officer of the Illinois Manufacturers' Association. Tax provisions in most states allow companies to carry over losses from recent years to help decrease taxes on income they owe during a set number of years into the future. That can help companies smooth out their tax burdens amid big profit swings during business cycles.

Under the newly passed measures, Illinois companies will be unable to put losses from previous years toward income during the next four years, potentially increasing their future tax liabilities, he said.

Suspending the carryover provision for four years is going to be "a double whammy" for companies that lost money in recent years, he added.

Some governors of nearby states jumped on the opportunity to try to steal businesses from Illinois. Newly inaugurated Wisconsin Gov. Scott Walker declared in a press release Wednesday that "Wisconsin is open for business."

He said he would dust off the slogan of a long-ago campaign to lure tourists to Wisconsin—"Escape to Wisconsin"—and aim it at Illinois companies.

"You are welcome here. Our talented workforce stands ready to help you grow and prosper," he said.

Illinois Gov. Quinn replied, "Lots of luck to them, but that's not going to happen."

He added that Chicago is the capital of the Midwest, and "if we want to talk about the capital of the Midwest, the state that is strongest is Illinois."

—Douglas Belkin contributed to this article.

Write to Ilan Brat at ilan.brat@wsj.com