Illinois tax rates out-of-sync with those in neighboring states, most of the nation – Wirepoints

By: Nick Binotti and John Klingner

Many factors motivate people to move out of Illinois, but taxes often rank highest on the list. For good reason.

Illinoisans pay the nation’s 2nd-highest property taxes. The 2nd-highest gas taxes. The 8th-highest sales tax rates and more. Overall, Illinoisans pay the nation’s 7th-highest combined state and local taxes – 12.9 percent of their incomes, according to the Tax Foundation. 

Combined with other factors including a poor jobs climate, crime and corruption, it’s no wonder Illinois has lost a net 1.4 million taxpayers and their dependents to other states over the last two decades. No state since 2000 has lost more residents per capita to out-migration other than New York and California.

As long as Illinois politicians fail to make the state’s tax rates competitive with the rest of the nation – especially with its neighbors, which have far lower rates – expect the drain will continue.

1. Illinoisans pay some of the nation’s highest overall taxes

The Tax Foundation’s latest annual “Facts & Figures 2023: How Does Your State Compare?” reports that Illinois’ total state/local tax burden, a combination of all taxes paid, rose to 12.9 percent of personal income in 2022 – the 7th-highest in the nation. In per person terms, that’s an average tax bill of $8,390.

Illinoisans’ total burden far outstrips any of its neighbors. The midwestern state closest to Illinois’ rate is Iowa, at 11.2 percent, although you can expect that gap to widen as Iowa continues its transition to a 3.9 percent flat income tax rate by 2026. 

Wisconsin is next with a 10.9 percent overall burden, followed by Kentucky, Indiana and Missouri all in the 9 percent range. At the far end is Michigan at 8.6 percent, a significant 4.3 percentage points lower than Illinois. Per capita taxes there are just $4,720 – almost half the amount of Illinois’.

2. Illinoisans pay the 2nd-highest property taxes

Of all the components that make up Illinois’ total tax burden, the $36.6 billion local governments collect in property taxes is by far the biggest.

Illinoisans pay the 2nd-highest effective property tax rate in the nation at 2.1 percent, behind only New Jersey. 

As far as Illinois’ neighbors go, Wisconsin’s property tax rate comes closest to Illinois at 1.6 percent, followed by Iowa’s at 1.5 percent. Missouri’s is just 1.0 percent. The property tax rate for Indiana is 0.8 percent – less than half that of Illinois’ – certainly a contributing factor for Indiana being the #2 destination for Illinoisans moving out of state. Illinois lost a net 17,000 residents to Indiana in 2022 alone – 31,000 Illinoisans left for Indiana, while just 14,000 Hoosiers moved to Illinois.

3. Illinoisans pay the nation’s 2nd-highest gasoline taxes

Illinoisans also pay the nation’s 2nd-highest state-level gasoline tax at $0.65 per gallon, trailing only California at $0.78 per gallon. Illinois’ tax is twice as large as Wisconsin’s ($0.33) and nearly three times more than Missouri’s ($0.22).

Gas taxes are even higher than that for many Illinoisans. Local governments including Cook County and the City of Chicago impose their own gas taxes, driving the average cost of gas even higher. (The federal government also imposes a per gallon tax of $0.184 nationwide, which we’ve left out to allow for a clear state-to-state gas tax comparison.)

One of the drivers of Illinois’ high gas taxes is that it’s one of only a few states that levies both a flat motor fuel tax and a sales tax on gasoline. That compounds Illinoisans’ tax burden during times when the price of gas is high. 

But it’s Gov. Pritzker’s doubling of the motor fuel tax that is most responsible for Illinoisans paying the 2nd-highest rate. The tax increased to $0.39 per gallon, up from $0.19 in 2019. The tax hike also imposes a yearly automatic rate increase tied to inflation. 

Today, the motor fuel tax is now at $0.454 per gallon, up 140 percent compared to July 2019.

4. Illinoisans pay the 8th-highest sales tax rate.

Illinois has the nation’s 8th-highest average combined state/local sales tax rate at 8.8 percent, less than a percentage point away from Louisiana’s #1 rate of 9.55 percent.

That 8.8 percent is the highest among its neighbors: one half a percentage point higher than Missouri and significantly higher than Wisconsin’s 5.4 percent. Indiana, Iowa, Kentucky and Michigan all have rates between 6 and 7 percent.

It’s worth noting that Illinois does not have a sales tax on services. However, since the sales tax is limited to only goods, it results in a higher rate as Illinois governments attempt to capture revenue from a smaller pool of taxable items. A balanced sales tax on both goods and services would result in a lower sales tax rate overall.

It’s also worth noting that two of the states with higher sales tax rates than Illinois are Tennessee and Washington – both of which have to rely heavily on sales taxes for revenue because they don’t tax incomes.

5. Illinois cell phone taxes are nation’s highest 

On top of all the other taxes above, Illinoisans pay the nation’s highest local cell phone tax rates – by far – at 22.65 percent. Among our neighbors, the closest state is Missouri at 15 percent. 

Indiana and Kentucky rates of about 11 percent are half that of Illinois’. And Wisconsin’s tax is just 7.9 percent, meaning Illinoisans pay three times more than their neighbors to the north.

6. The state’s flat income tax places Illinois in the middle of the pack.

Illinois’ flat personal income tax of 4.95 percent is the only comparatively low major tax Illinoisans pay. On a revenue basis, the state collects $1,413 per person – the 16th-most in the nation, based on 2020 tax data.

Unfortunately for Illinoisans, that one “advantage” is being worn down as over half the states in the country have either cut their progressive income tax rates, moved to a low, flat rate, or even joined the growing number of zero-income tax states over the last three years. Those reductions include all of Illinois’ neighbors. 

And with those cuts, every neighbor other than Wisconsin now has, or will have, a lower income tax rate than Illinois.

With all these major changes to income tax rates, Illinois can expect to worsen in the rankings as future data is released. Not because Illinois politicians hiked income taxes, but because they’ve done nothing as other states have eased their burdens.

Overburdened

Many people are willing to pay higher taxes for high-value services, but when employment growth is lagging, businesses are leaving, crime continues to increase, and 1.2 million public school children can’t read at grade level, you can’t blame taxpayers looking for greener pastures elsewhere. 

Not when they are forced to pay among the highest taxes in the nation.

Read more from Wirepoints:

• 22 states, including every Illinois neighbor, cut income taxes permanently. But not Illinois.
• New ranking shows worsened business tax climate for Illinois
• Illinois’ coming drop in Medicaid enrollment should be good news, not a lament
• As population woes continue, Illinois’ loss of congressional seats could accelerate