Research & Commentary: Progressive Tax Will Worsen Illinois Economic Woes

Published May 10, 2018

Out-of-control spending and exorbitant taxation in Illinois is a systemic problem that is driving the state towards economic Armageddon. Illinois homeowners already pay the highest median property tax rate in the nation, with various agencies and governmental bodies imposing a combined average rate of 2.67 percent, according to a CoreLogic analysis of real estate property taxes nationwide.

Altogether, Illinois legislators have created the highest tax burden in the United States. Currently, the combined state and local tax rate in Illinois ranked dead last in severity according to a March report by WalletHub. The average effective state and local tax rate on an Illinois household at the median U.S. income adds up to an oppressive 14.9 percent.

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. Since 2010, Illinois’ ranking plunged from the 17th most competitive tax climate for businesses to 29th in 2018.

The one area of the Tax Foundation’s rankings where Illinois ranked amongst the better states was the personal income tax, where the state ranked 16th. Unfortunately, one gubernatorial candidate and several members of the General Assembly are pushing to increase the state’s personal income tax burden by moving from a flat tax system to a progressive tax system.

At present, the Illinois Constitution requires a flat tax, meaning a change to a progressive system would require a constitutional amendment approved by a voter referendum and three-fifths of the state legislature. Flat taxes are beneficial for several reasons. First and foremost, they don’t disproportionately penalize the citizens who produce the majority of jobs and economic activity with higher tax rates. Illinois’ current flat tax rate is 4.95 percent, after being increased from 3.75 percent in 2017.

Transforming Illinois’ personal income tax system from a flat tax to a progressive tax would impose a significant increase in taxes on middle-income families and small business owners. Progressive tax plans are not a novel idea in Illinois—in recent years the legislature has considered several plans that would negatively impact the state’s sinking economy.

One tax plan that could be a harbinger of things to come in Illinois was recently proposed by State Rep. Robert Martwick (D). The bill, which died in the state legislature, would have charged several rates at different tax brackets: 4 percent for income up to $7,500, 5.84 percent for income up to $15,000, 6.27 percent for income up to $225,000 and 7.65 percent for income more than $225,000. Under Martwick’s progressive tax plan, anyone earning more than $15,000 a year would see a tax increase.

The Illinois Policy Institute (IPI) examined a similar plan proposed in 2013 and found it would have forced tax hikes on 85 percent of Illinois taxpayers. IPI projected the tax plan would have destroyed as many as 65,000 jobs and cost the state $19 billion to $26 billion in lost economic output. Progressive taxes also have more volatility in tax revenues than flat tax systems, making budgeting less reliable.

Imposing a progressive income tax would only increase the tax burden borne by every taxpayer and further damage Illinois’ struggling business climate. Illinois is already an economic basket case: its population is decreasing at an alarming rate, unemployment remains high, and future unfunded liabilities are all pressing problems. Simply put, increasing taxes on Illinois residents is the wrong path for the state, and will only compound existing issues. 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
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.”
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
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.

Moving to a Progressive Income Tax Would Increase Taxes on the Majority of Illinois Employers
Elizabeth Malm of the Tax Foundation examines the effect a progressive tax would have on Illinois’ businesses. Malm argues this tax change would impact a large share of Illinois employers because many are pass-through businesses which pay taxes via the individual income tax rather than the corporate income tax.

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?
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
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.

Rich States, Poor States
The eleventh edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.


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 website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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