Illinois’ tax policies are putting the state at a competitive disadvantage when it comes to startups, investment and economic growth, according to investor and former CME board member Jeff Carter, who joined Chicago’s Morning Answer to discuss the state’s finances and business climate.
Carter, who founded Hyde Park Angels, co-founded West Loop Ventures and writes the Points and Figures Substack, told hosts Jeanne Ives and Jim Iuorio, who were filling in for Dan Proft, that Illinois has made a series of policy decisions that discourage investment and entrepreneurship.
One of the biggest concerns discussed was Illinois’ decision to opt out of a federal tax provision known as Qualified Small Business Stock, or QSBS. Carter explained that the provision is designed to encourage investment in early-stage companies by offering significant tax benefits to investors who take the risk of backing startups.
Carter said QSBS was an important consideration when he was involved with Hyde Park Angels, particularly because early-stage investing carries a high risk of failure. Under the federal provision, qualifying investors can receive favorable tax treatment when a successful investment produces substantial gains.
Illinois, however, opted out of the provision for state income-tax purposes under Gov. JB Pritzker, according to Carter. As a result, he argued that Illinois-based investors and investment funds can face state taxes on gains that would otherwise receive favorable treatment under the federal tax code.
That puts Illinois at a disadvantage compared with neighboring states, Carter said, particularly at a time when the state is already struggling to attract venture capital.
Carter said Chicago’s startup ecosystem has changed dramatically since he helped launch Hyde Park Angels in 2007. At the time, he said, there was relatively little early-stage investment activity in the city. Over the years, Chicago developed a much stronger startup community and attracted billions of dollars in venture investment.
But Carter said that momentum has slowed significantly. He estimated that Chicago received roughly $2.5 billion in venture funding last year, with much of the money concentrated in a small number of companies.
The problem, Carter said, is not necessarily that entrepreneurs cannot start companies in Chicago. Instead, the difficulty is attracting employees and raising the capital necessary to grow those companies. Entrepreneurs increasingly have to look to New York, San Francisco and other major markets for investment, he said, with some ultimately leaving Chicago altogether.
The discussion also touched on 1871, the Chicago technology and entrepreneurship hub that Carter said was promoted as a major success story but ultimately failed financially. Carter contrasted that experience with Techstars Chicago, which he credited with helping produce successful companies and entrepreneurs.
Carter argued that the broader lesson is that successful startup ecosystems are ultimately driven by investment and strong business ideas rather than government-backed branding campaigns.
The interview then expanded into Illinois’ larger fiscal problems, including the possibility of future federal assistance for states facing severe financial challenges.
Carter agreed with Iuorio’s concerns about the erosion of federalism and the possibility that states with significant debt could eventually look to Washington for assistance. He pointed to the federal response to the COVID-19 pandemic as an example of how large amounts of federal money can flow into states without necessarily resolving their underlying fiscal problems.
Carter also discussed the role of municipal bond funds and exchange-traded funds in supporting the debt markets of states and cities with significant financial obligations. Because some funds are required by their investment mandates to remain broadly invested, Carter said they may continue purchasing portions of higher-risk municipal debt, including bonds issued by places such as Illinois and Chicago.
The conversation turned to inflation and the effect it has had on heavily indebted governments. Carter said the United States faces a difficult long-term fiscal problem because of the size of the national debt and the political unwillingness to substantially reduce government spending.
Carter argued that the country ultimately faces a choice between inflation and a potential fiscal crisis, noting that inflation reduces the purchasing power of existing dollars and can make assets appear more valuable in nominal terms even when their real value has not increased to the same degree.
The contrast between Illinois and other states became particularly clear when Carter discussed his decision to leave Chicago for Nevada. He compared the property taxes on his former Chicago condominium with those on a significantly more expensive home in Nevada.
Carter said he paid approximately $8,000 a year in property taxes on a roughly $305,000, one-bedroom Chicago apartment. After moving to Nevada, he purchased a substantially larger home valued at approximately $1.25 million at the time, with property taxes of about $9,000 annually following a major renovation.
He also pointed to Nevada’s lower sales-tax rate and limits on annual property-tax increases as examples of how states can create different incentives for residents and businesses.
For Carter, those differences illustrate the broader competition between states for people, investment and economic activity. Illinois is not operating in isolation, he said, and policies that make it more expensive to invest or build a company can encourage entrepreneurs and capital to move elsewhere.
The discussion comes as Illinois faces continued debates over taxes, spending and Gov. Pritzker’s budget proposals. Ives and Iuorio specifically questioned the governor’s reliance on new revenue sources, including a digital advertising tax, after a Maryland court struck down that state’s digital advertising tax.
Carter’s broader message was that Illinois needs to consider the long-term consequences of its tax and regulatory policies rather than simply looking for additional sources of revenue.
For a state seeking to rebuild its startup ecosystem and attract new investment, Carter argued that making Illinois less competitive with other states is likely to have consequences well beyond a single tax bill.