In an effort to close a huge budget gap, the Illinois legislature voted on January 11, 2011, to raise the personal income tax rates from to 5% (up from 3%), and the corporate rates to 7% (up from 4.8%). The rate hike on individuals is 66% (the initial proposal had called for a 75% rate hike). I view these massive tax increases as economic suicide.

Tax increases discourage business formation and growth. Low taxes are essential for job formation, good wages paid to workers, and ultimately more revenue collected from taxpayers on their increased compensation and profits. A case in point is South Dakota, the state identified by the Tax Foundation as having a “tax system [that] is most welcoming to economic activity.”

In South Dakota, there is no personal income tax, no tax on individual capital gains, no corporate tax, and no death taxes. Still South Dakota manages to pay its bills, and its economy, while not without problems, is more robust than in many other states. The unemployment rate there is 4.4%, compared with the national rate of 9.4%. And South Dakota’s Gov. Dennis Daugaard has said that he “plans to emphasize state programs to expand business and create jobs because they are key to solving South Dakota's long-term budget problems.” Instead of raising taxes, he wants to expand a streamlined low-interest loan program for small businesses.

The tax battles at the state level are a reflection of what to expect on the federal level when the extension of the Bush-era tax cuts runs out at the end of 2012. To address the deficit, painful and politically unpopular spending cuts will have to be made if tax rates are to remain at current levels. Let’s hope that our representatives remember the actions of Illinois and South Dakota.