A graduated income tax could put Illinois in the clear

Instituting a progressive income tax in Illinois would destroy the economy and drive people to flee the state, according to Gov. Bruce Rauner and his supporters.

After the economic refugees got over the border, however, they’d have to keep running.  That’s because income tax rates are higher in every bordering state, according to a recent study by the Illinois Economic Policy Institute.

Illinois currently has a flat 3.75 percent individual income tax.  Indiana is the only neighboring state with a flat rate – it’s 3.3 percent. But Indiana permits counties to levy income taxes, and the average county rate is 1.5 percent.

The other states have progressive rates; the lowest is Missouri’s, which rises in steps from 1.5 percent to 6 percent – that’s for people earning less than $1,000 a year and those earning over $9,000 a year, respectively.  Wisconsin’s top rate, which is for individuals earning over $69,000 a year, is 7.65 percent; Iowa’s is 8.9 percent for people earning over $60,000.

Looking at the combination of state and local taxes, all the states have regressive tax structures, with poor people paying a higher proportion of their income than the wealthy.

But Illinois is the worst. Here the bottom fifth of earners pay 13 percent of their income in state and local taxes, while the top 1 percent pays 4.6 percent, or about a third of what poor people pay.

Compare that to Wisconsin, where the bottom fifth pays about 9 percent of its income, and the top 1 percent pays a little over 6 percent.

Progressive taxation is fairer, since the people who pay more are those who can afford to, and it’s also more efficient and stable because it taxes the sector that has benefited from economic growth for the past several decades.

But perhaps the most interesting statistic – particularly with our accumulated budget deficit topping $9 billion and growing – is how the neighboring states bring in much more revenue than Illinois.  That’s not just from a smarter income tax; it’s because unlike Illinois, they’ve all extended their sales taxes to cover services, and they all tax some retirement income.

Adopting Indiana’s tax structure would give Illinois $4.6 billion more each year.  Using Iowa’s structure would bring in $7.3 billion more, and Wisconsin’s would yield $8.3 billion more.

That would put Illinois in the clear.

House Democrats have introduced a constitutional amendment to permit a progressive income tax; and if that’s passed, they will introduce legislation that would provide a tax cut to all but the wealthiest taxpayers in the state and raise an additional $1.9 billion a year.

Under that plan, introduced by Rep. Lou Lang, D-Skokie, the tax rate on incomes up to $100,000 (twice that for couples) would be reduced to 3.5 percent. It would rise to the current rate of 3.75 for income up to $500,000, to 8.75 for the next $500,000, and to 9.75 for income over $1 million ($1.5 million for couples).

According to Voices for Illinois Children, that means a couple earning $1 million would pay an additional $11,785 in income taxes.

That’s probably not enough to cover their costs of relocating — especially when they’d end up paying higher taxes if they moved next door.

Lang’s proposal doesn’t put Illinois’ budget in the black, but it goes part of the way.  According to the Center for Tax and Budget Accountability, the state could raise an additional $2 billion by extending the sales tax and another $1 billion by taxing retirement income over $50,000.  And there are huge corporate tax loopholes that are ripe for the closing.

For decades, Springfield Democrats have shied away from these kinds of reforms, putting their political fortunes ahead of fiscal responsibility.  Now Rauner has brought the state to the brink of disaster; maybe the legislature will muster the courage to act.

  • Wrong. The current budget deficit number you are using assumes the same pension contributions we are making. Funding them properly would take another $6-7 billion per year. Wisconsin’s pensions are fully funded mostly because benefits are far lower.
    More importantly, you have to look at all levels of government, most of which are also bleeding red. They, too, would need huge increases, even though property and sales tax rates are astronomical. The same taxpayers have to pay. In short, replicate Wisconsin or any of those other states, and we’ll still be sinking fast into deeper insolvency.

    • tabster

      The idea that generating more tax revenue somehow makes us have a higher deficit is just silly on its face.

  • jlcrane

    But but but we have the second highest property tax in the nation. Put a 1% cap on property taxes and your progressive income tax is a go. Problem is you cannot look at one Illinois tax without considering the total tax burden levied on Illinoisans.

    • Curtis Black

      The comparison of states in the article does in fact look at the totality of state and local taxes. Also, the reason Illinois has such high property taxes is because the state doesn’t meet its constitutional obligation to provide primary funding for schools, so localities bear the burden. That could be another reason for a progressive state tax.

  • tabster

    Honestly I think 3.5% is too low. I’d rather couples that make over $100K combined pay 5% and get additional revenue to fund education better than we do (and I’m saying that as part of a couple that does make more than that amount), then jump it up to the higher amounts over $500K.

  • ronwf

    “After the economic refugees got over the border, however, they’d have to keep running.”

    So? They would. Ask Texas what’s happening. People who leave Illinois don’t stop in adjoining States, they go to Texas and other such States. So your comparison of Illinois tax rates to adjoining States’ rates is meaningless in that context.