By: Ted Dabrowski and John Klingner
Continued from Part 2: Loss in income is one of nation’s worst
Illinois is losing the state-to-state battle for people, and those losses are doing real damage to Illinois’ tax base and its economic vitality. Last year alone, Illinois netted a loss of 86,000 residents and that left the state with $4.8 billion less in taxable income. Only New York suffered bigger net outflows of income.
But the losses in 2018 weren’t just a one-time thing for Illinois. Wirepoints analyzed domestic migration data from the Internal Revenue Service data since 2000 and found Illinois netted annual losses of $1.4 billion to $4.8 billion in Adjusted Gross Income every single year during that 17-year period.
The problem with Illinois’ chronic outflows is that one year’s losses don’t only affect the tax base the year they leave, but they also hurt all subsequent years. The losses pile up on top of each other, year after year. And when you lose income to other states for 17 straight years, the numbers add up.
In 2016 alone, the latest year of data available from the IRS, Illinois would have had $40 billion more in AGI to tax had it not been for the state’s string of yearly losses in income. Based on data from the Illinois Department of Revenue, Wirepoints calculates the state lost out on as much as $1.2 billion in tax revenues that year as a result of that missing AGI.
The AGI lost is striking when you add up Illinois’ losses since 2000. Illinois lost a cumulative $310 billion in AGI over the 2000-2016 period. For comparison, Florida, the nation’s biggest winner, gained nearly $1 trillion in AGI. Texas, the number two winner, gained $250 billion. What Illinois lost, Texas gained.
Illinois’ AGI loss of $310 billion represents as much as $10 billion in lost income tax revenues over the 2000-2016 period.* That calculation is based on the average effective tax rate on the state’s AGI over the entire period. (See Methodology below for more details and information on the potential impact of retirees.)
Illinois’ losses are even more staggering when you compare them to what could have been. Imagine that instead of losing residents for years, Illinois had gained them. That would mean a bigger tax base and, everything else equal, lower average tax burdens on everybody.
To see what that looks like, take Tennessee, a state that’s made itself attractive to residents around the country. The Volunteer State has added an average of 20,000 net residents and $600 million in net AGI yearly to its economy since 2000.
Some of the increases may be small, but that income still builds up over time. The new crop of residents and the incomes they bring with them are piled on top of what was accumulated in previous years. It’s a virtuous cycle where growth begets growth.
In all, Tennessee has accumulated $76 billion in additional AGI since 2000. Compared to Illinois, that number is even more impactful since Tennessee has half the population Illinois does.
Illinois is trapped in a vicious cycle of skyrocketing government costs and ever fewer people to pay for them. Illinois has shrunk five years in a row, Chicago has shrunk four, and that trend will only intensify as tax hikes, and not reforms, continue to be politicians’ only solution.
Gov. J.B. Pritzker’s progressive tax proposal is just the next step in that cycle. He and other tax proponents think that the wealthy will stay to pay for a 60 percent hike on their income taxes. And they must also assume that only young and poor residents leave Illinois. We’ll bust that myth in Part 4 of this series.
* It’s important to note that Illinois’ actual tax revenue losses are much higher than what the IRS data suggests. That’s because their work focuses only on income taxes and does not cover sales, property, license, gas and other taxes and fees.
Wirepoints calculates Illinois lost as much as $10 billion in income tax revenues over the 2000-2016 period due to AGI lost to domestic out-migration.
Wirepoints had to determine effective income tax rates based on the state’s AGI to estimate the amount of taxes lost because the IRS migration data only provides AGI, and not taxable income,
Wirepoints calculated effective tax rates by dividing each year’s tax revenues by that year’s AGI. IDOR data was only available for 2007-2016. The effective rates are provided below.
Wirepoints applied each year’s effective tax rate to the total cumulative AGI lost in each year. For the years 2000-2006 – for which IDOR data is not publicly available – we used a 2.5 percent rate based off of the rates in the 2007-2010 period.
Applying those effective tax rates resulted in a nearly $10 billion loss in tax revenue for Illinois over the 2000-2016 period.
Some may question the impact retirees might have on the $10 billion calculation considering Illinois does not tax retirement income. But as noted above, IDOR’s AGI includes retiree income, meaning its impact is captured in the effective tax rates we used.
Retirement incomes, then, will only reduce the tax losses insofar as they make up a greater share of Illinois’ lost AGI as compared to their share of Illinois’ total AGI.