By: Ted Dabrowski and John Klingner
Gov. J.B. Pritzker can’t get the progressive tax scheme he wants until 2021 at the earliest – it needs to pass both houses then go to the people for a vote first. But expect him to push hard for it in his inaugural budget address. Pritzker will likely point to the fact that more than 30 states have progressive income taxes. And he’ll try to make Illinois sound like an outlier when it comes to taxation.
Illinoisans shouldn’t be persuaded by those arguments. They’re misleading. Pritzker is ignoring four key facts that strongly condemn Illinois’ move to a progressive scheme. Collectively, they should crush Pritzker’s progressive tax push.
Hitting the middle class
Let’s start with the fact Pritzker’s plan simply won’t work as he’s advertised it. That’s particularly true if he tries to fulfill all the spending promises he made while on the campaign trail.
Pritzker never proposed any tax rates for his plans, but Wirepoints ran estimates based on his spending promises and released them in a report titled: What Pritzker’s progressive tax rates will probably look like. Even if Pritzker got the minimum in new spending that he promised – about $11 billion more – the progressive tax rates needed to raise that amount would hit Illinois’ middle class particularly hard.
Those rates blow a hole in Pritzker’s biggest promise – that he can raise the money he wants by hitting the rich only. To achieve his minimum spending promises, Wirepoints’ found that the middle class with incomes of $50,000 and above would have to be hit with significantly higher taxes.
Under the above scenario, an Illinoisan with $75,000 in taxable income will pay nearly $900 more in taxes, up 24 percent compared to the current flat tax of 4.95 percent.
And for two married, career teachers earning a combined $138,000 in taxable income (the average Illinois teacher salary is nearly $71,000 according to COGFA), the progressive scheme would hike their taxes 50 percent, to $10,270 a year, up from their current $6,831 bill.
And an Illinoisan that makes $1 million will see her taxes double, growing to $100,000 a year from the $50,000 she currently pays under the flat tax.
Wirepoints also ran tax scenarios that avoided hitting the middle class. We found that if Pritzker’s progressive taxes only raised rates on the “truly” wealthy, then Illinois’ top tax rate would have to reach absurd levels. See those potential tax rate scenarios here.
And keep in mind the above tax rates only apply to Pritzker’s minimum spending promises. If he spends more, the rates get even more burdensome.
Making Illinois even more uncompetitive
Any move to a progressive tax scheme will make Illinois even less competitive with its neighbors. A majority of Illinois’ neighboring states – those with whom it competes for people, businesses and investment – are flat tax states.
Indiana has a flat tax rate of 3.23 percent, far lower than Illinois’ 4.95 percent flat rate.
Michigan’s flat tax rate is lower too, at just 4.25 percent.
Kentucky, which just dumped its progressive income structure for a flat one in 2018, taxes its incomes at 5 percent.
Even Missouri, which is in-name a progressive tax state, operates like a flat tax state. Yes, it has 10 tax brackets, but its highest bracket is 5.9 percent on incomes of $9,072 and above. For all practical purposes, it’s a flat tax state at 5.9 percent.
So effectively four of Illinois’ six neighbors are flat tax states.*
Only Wisconsin and Iowa have traditional progressive income taxes. Their highest marginal rates are 7.65 percent (on $247,350 and above) and 9.98 percent (on $71,910 and above), respectively.**
Making Illinois an even bigger outlier
At 11 percent, Illinoisans already pay the nation’s 6th-highest*** combined state and local taxes as a percentage of state personal income. Wisconsin is the only neighbor that pays a similar rate. The remainder of Illinois’ neighbors are in the middle of the pack nationally – all below 9.5 percent – and all below the national average (9.9 percent).
A big reason for that ranking is Illinois’ near-highest-in-the-nation effective property tax rates.
Illinois is an extreme outlier in the country with rates far higher than those in neighboring states, according to the Tax Foundation. Illinois’ property taxes, at 2 percent of home value, are more than double those in Indiana, Kentucky and Missouri.
Defenders of a progressive tax structure will argue the new structure allows the state to do a “tax swap,” where the state would hike income taxes on the rich in exchange for lower property taxes on homeowners.
But that argument is disingenuous. As pointed out above, if Pritzker’s spends what he’s promised, then any progressive tax structure will have to hit the middle class, unwinding the benefits of any proposed tax swap.
It’s also a false choice. It’s not as if high property taxes or high income taxes should be the only alternative for Illinoisans. In fact, the eight states that don’t tax incomes all have lower property tax rates than Illinois does.
Washington, for example, has a zero income tax rate and yet its property tax rates, at 1 percent, are at half the level of Illinois’. Tennessee’s property tax rates are even lower at 0.75 percent.
Shrinking the tax base
Illinois is already losing its tax base, which is bad news for supporters of progressive taxes. Illinois is just one of three states in the nation to lose population at least five years in a row. Higher marginal taxes on the middle- and higher-income earners will only accelerate that loss.
The big driver of population loss is the flight of Illinois residents to other states. Since 2001 alone, Illinois has lost a net of 1.4 million residents to other states. That’s 11.4 percent of what Illinois’ population was in 2001 and the second-worst loss of residents in the country. Only New York fared worse.
And not only is Illinois’ tax base shrinking as the total population falls, but those who are leaving have higher incomes than those who come into Illinois. A look at IRS data shows the average income for a fleeing Illinoisan is $81,000. In contrast, those migrating into Illinois make just $67,000.
There’s no good reason for Pritzker to implement a progressive tax structure. Major structural reforms, not tax hikes, are the cure for Illinois’ fiscal woes.
Yes, polls show a majority of Illinoisans favor of a progressive income tax. But that’s because it’s been sold to them as a tax solely on the rich. Pritzker and other progressive-tax advocates wouldn’t get the support they do if they told the truth: their high-spend, no-reform policies will require tax hikes on the middle class.
Illinois can’t afford the consequences of a progressive tax. The state is already too uncompetitive with its neighbors. It’s too much of an outlier on taxes. And it’s losing too many people. A progressive tax scheme simply isn’t the right thing for Illinois.
*Michigan, Indiana, Missouri, Iowa and Kentucky allow their local governments to impose their own income taxes or a local surtax on top of the state income tax. Illinois and Wisconsin do not. However, taxpayers in Illinois and Wisconsin still face the highest overall state/local tax burden vs. their neighbors.
**Iowa is in the process of flattening its progressive income tax structure. Currently, Iowa income taxes range from 0.36 percent for incomes of $1,628 or less to a top rate of 8.98 percent for incomes over $73,260. By 2023, the low rate will be 4.4 percent for incomes of $6,000 or less and the top rate will 6.5 percent for incomes of $75,000 or more.
***Wirepoints cites the 2012 state/local tax burden because it is the latest data available from the Tax Foundation. The 2012 data also serves as the best proxy for Illinois’ current tax burden as a temporary income tax rate of 5 percent was in place at that time.
Read more about why a progressive tax would be a mistake: