Policy Documents

Research & Commentary: Should Illinois Move to a Progressive Tax System?

February 5, 2014

Just a few years ago Illinois’ tax competitiveness compared well to its neighbors and other states. The Tax Foundation’s State Business Climate Index ranks states based on more than 100 variables, ranging from income taxes to property taxes. Illinois’ ranking plunged from the 17th most competitive tax climate for businesses in 2010 to 31st in 2014 as a result of the large tax increases on individuals and businesses passed in 2011.

Instead of working to improve the state’s tax climate and encourage businesses to build and expand in Illinois, several state lawmakers are considering new tax proposals to move away from the current flat tax to a progressive tax. Under a progressive tax system, tax rates increase as the taxable income amount increases.

Progressive taxes are a form of income redistribution, with the taxes paid by higher income earners used to cover government services for lower income earners. Supporters of the progressive tax argue this is both fair and an example of social justice, but these taxes violate democratic principles by placing an undue burden on certain people. Even under a flat tax, those who earn higher incomes pay more in taxes, achieving the “social justice” progressive tax proponents claim to seek.

Changing Illinois’ tax system from a flat tax to a progressive tax would impose a significant increase in taxes on the state’s middle-income families. One progressive tax plan would force tax hikes on 85 percent of Illinois taxpayers, according to the Illinois Policy Institute. Under another progressive tax plan, as many as 65,000 jobs could be destroyed and anywhere from $19 billion to $26 billion of economic output lost, the institute projects.

Progressive tax systems also have more volatility in tax revenues than flat tax systems, making budgeting less reliable. Relying on a small percentage of higher-income taxpayers for a larger percentage of revenues generates revenue windfalls and spending free-for-alls during economic booms, followed by massive budget gaps during economic recessions.

Illinois currently has the 11th highest total tax burden in the nation, as a percentage of income. Imposing a progressive income tax would only increase the tax burden borne by every taxpayer while making Illinois a less attractive place to do business. The Tax Foundation found the proposed progressive income tax plans would drop Illinois’ business tax climate ranking down to 44th. Illinois legislators should focus on making the state a more attractive place for businesses and workers by restraining spending, lowering taxes, and reducing unnecessary regulations.

The following literature examines progressive taxation from multiple perspectives.

Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Illinois Considers Further Income Tax Increases as Temporary Tax Nears Expiration
http://taxfoundation.org/article/illinois-considers-further-income-tax-increases-temporary-tax-nears-expiration
Lyman Stone of the Tax Foundation examines Illinois’ 2011 tax hikes and the proposed switch to a progressive tax system. Stone argues moving away from the current flat tax could have dire consequences for the state’s economy: “Extending what was meant to be a temporary tax increase, or significantly increasing the state’s income tax still further, would sidestep these fundamental issues while worsening the state’s already shaky economic footing.”

Progressive Income Tax Money Grab Disguised as Tax Reform
http://illinoispolicy.org/policy_posts/progressive-income-tax-money-grab-disguised-as-tax-reform/
Ted Dabrowski of the Illinois Policy Institute dispels several myths behind progressive taxes. Dabrowski argues a progressive income tax would raise taxes on middle-income Illinoisans and destroy needed jobs for poor and working families. 

Tax Foundation: Progressive Income Tax would Destroy Illinois’ Businesses Climate
http://illinoispolicy.org/tax-foundation-progressive-income-tax-would-destroy-illinois-businesses-climate/#sthash.1iXoOH2L.dpuf
Benjamin VanMetre of the Illinois Policy Institute examines an analysis from the Tax Foundation of the proposal to dump Illinois’ fair, flat tax in favor of a progressive tax that would force people to pay higher taxes as their income increases: “The conclusion was unsurprising: a progressive income tax would deliver a devastating blow to Illinois’ already struggling business climate.” A Heartland Daily Podcast with Mr. VanMetre is available here.

What’s Wrong with the Progressive Income Tax?
http://www.mackinac.org/1706
Burton Folsom writes for the Mackinac Center about the progressive income tax. The progressive income tax – based on the principle that the more a taxpayer earns, the more he or she should pay – is not what the nation’s Founders intended. The progressive income tax allows politicians to protect friends, punish enemies, and tax certain groups to give benefits to other groups.

Comments on Who Pays? A Distributional Analysis of the Tax Systems in All 50 States
http://heartland.org/policy-documents/comments-who-pays-distributional-analysis-tax-systems-all-50-states
Elizabeth Malm of the Tax Foundation critiques a recent report from the Institute on Taxation and Economic Policy (ITEP) that  attempts to examine the overall level of regressivity of the tax systems of the 50 states and Washington, DC. Malm finds ITEP’s recommendations are at odds with sound state and local tax policy.

Does Progressive Taxation Make State Budgeting More Difficult?
http://neighborhoodeffects.mercatus.org/2011/05/27/does-progressive-taxation-make-state-budgeting-more-difficult/
Matt Mitchell discusses the effect of a progressive tax system on state budgeting in this Mercatus Center report. Mitchell says states with a progressive tax system have found it increasingly difficult to forecast tax revenues and set budgets. “In sum: it appears that progressive taxation seems to be a recipe for rapid revenue growth when the economy is expanding (even tepidly). But it also seems to lead to larger budget gaps during recessions,” he writes.

What Is the Evidence on Taxes and Growth?
http://heartland.org/policy-documents/what-evidence-taxes-and-growth
In this Tax Foundation study, William McBride examines the effects of tax policy on economic growth. He finds the literature on the topic demonstrates long-term economic growth is to a significant degree a function of tax policy. If governments seek to spur investment, he writes, they should lower taxes on the earnings of capital. If they seek to increase employment, they should lower taxes on workers and the businesses that hire them. The article includes a discussion of the effects of progressive tax systems.

The Inequity of the Progressive Income Tax
http://www.hoover.org/publications/policy-review/article/72291
Kip Hagopian of the Hoover Institution contends the most compelling argument against the use of a progressive income tax to redistribute income is that it is inequitable: “Under a progressive income tax, the welfare of one group in a society has been increased at the expense of the welfare of a different group.” Hagopian dismantles arguments for the progressive income tax and proposes a new doctrine of tax fairness.

Tax Progressivity and Income Inequality
http://heartland.org/policy-documents/tax-progressivity-and-income-inequality
Denvil Duncan and Klara Sabirianova Peter examine whether income inequality is affected by the structural progressivity of national income tax systems. Although progressivity reduces observed inequality in reported gross and net income, it has a significantly smaller impact on true inequality, approximated by consumption-based measures of Gini, the authors note. They show theoretically and empirically that, under specific conditions, tax progressivity may increase actual inequality, especially in countries with weak law and order and a large informal nontaxable sector.

The Effect of Progressive Tax Codes
http://heartland.org/policy-documents/effect-progressive-tax-codes
Bill Ahern of the Tax Foundation discusses the effects of different kinds of progressive taxes on taxpayers and the economy.

Indiana and a Progressive Tax Structure
http://heartland.org/policy-documents/indiana-and-progressive-tax-structure
Cecil Bohanon examines the essential difference between a proportional (aka non-graduated or flat) income tax and a progressive or graduated income tax. He analyzes data indicating how progressive income tax structures actually operate in the 34 states where they are in place. 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.