Illinois’ So-Called ‘Millionaire Tax’ Makes All Taxpayers a Target
The “millionaire tax” will increase Illinois’ tax burden without necessarily increasing public funds. Revenue intended for education may fall short of expectations and will likely be absorbed by school administration before reaching students.
A “millionaire tax” is gaining traction in the Statehouse, but the idea has backfired elsewhere. It puts all Illinois taxpayers at risk as they lose their constitutional flat tax protection.
Plus, there’s no guarantee this plan to invest in education will make it to classrooms rather than being absorbed by district administration.
State Rep. Curtis J. Tarver II, D-Chicago, is pushing a tax hike proposal that amends the Illinois Constitution to impose an additional 3% tax on income over $1 million. Revenue would be directed to school districts.
While voters statewide rejected a proposal to put various tax rates on different income groups in 2020, state lawmakers repackaged the progressive income tax rates into a nonbinding ballot question about taxing millionaires for property tax relief. It passed in November, emboldening Tarver to ask again to remove the Illinois Constitution’s flat tax guarantee.
The pushback against a flat tax comes despite its advantages. For governments, a single-rate system simplifies state revenue forecasting. For taxpayers, determining tax liability is easier, enhancing transparency and decision-making. Additionally, a flat tax functions as a safeguard against tax hikes, as any increase applies to all taxpayers and can trigger widespread opposition.
Because a flat tax limits how easily lawmakers can raise revenue for increased spending, proposals for a progressive tax often resurface. A progressive tax allows revenue to be raised from specific groups without broad resistance. State leaders also admitted the move would make it easier to state taxing retirement income.
While the proposal claims to boost education funding, funds would likely be absorbed by administrative costs well before reaching classrooms. The higher taxation also risks wealth flight, as those best able to afford a move take their money elsewhere and leave fewer people with less money to support the same burden. The tax also imposes greater costs on small businesses while setting a precedent for broader tax increases in the future.
Untold story of a ‘millionaire’ tax
If past experience is any guide, the purported benefits of a “millionaire income tax” tend to evaporate. They typically fail to generate stable revenue, making for an unreliable funding source and, far from filling state coffers, are far more apt to discourage investment, slow economic growth and increase moves out of the state. Those patterns have been seen across states that have tried it.
Massachusetts experienced a net loss of $4.28 billion in taxable income between 2020 and 2021, driven by people leaving, as it ranked among the top states losing households during that period. If the trend continues, the state could see a total loss of $19.2 billion in adjusted gross income, resulting in $961 million in lost income tax revenue annually.
From 2013 to 2020, California saw a net loss of 4,000 top-bracket taxpayers. Their departure yielded outsized fiscal consequences because the state relies heavily on high earners for revenue — just 185,000 households accounted for nearly 45% of all personal income taxes collected in 2020.
When these taxpayers leave or restructure their earnings, it reduces revenue, slows investment, stifles job creation and deepens budget shortfalls.
Every tax increase encourages individuals to seek better opportunities elsewhere, deterring investment, slowing economic activity and disrupting economic incentives for individuals to work or invest in high-tax states. With Illinois already struggling with slow economic growth and the third-highest unemployment rate in the country at 5.2%, higher taxes could make it even more difficult for Illinoisans to reinvest in the local economy and create jobs.
A “millionaire tax” could hit small businesses especially hard. Approximately 23,740 Illinois small businesses structured as S-corporations and partnerships would experience a 61% increase in their top marginal state income tax rate. These rising costs would undoubtedly cut into business expansion and hiring while also undermining their long-term viability.
Beyond its adverse business impact, this tax proposal sets a precedent for a broader progressive tax structure – and even potential retirement taxes – while creating conditions that could lead to raising some of America’s highest corporate income taxes to even higher levels.
Illinois education: costs and results
Tarver’s proposal does not outline specific spending requirements but allocates revenue collected from a “millionaire tax” on a per-pupil basis, which does not mean the funds will be directly allocated to students. Instead, funds will flow through the Illinois State Board of Education before being directed to school district administrators, who will determine how the funds are allocated.
Illinois has significant school administrative overhead: nearly half of its 852 school districts serve only one or two schools. That leads to duplicated administration and increased costs that are double the national average. Student enrollment is declining statewide, but school administrator hiring has increased by 20% during the past decade. Since the pandemic, 127,000 students have left the system, yet taxpayers continue to fund more school staff, with administrative expansion outpacing classroom needs.
Given this trend, additional funding is likely to be absorbed by administrative costs rather than directly benefiting students. Illinois already spends more per student on school administration than most other large states, raising questions about whether new revenue will meaningfully improve education outcomes.
Illinois’ students are struggling in reading and math. Simply increasing per-pupil funding does not guarantee improved education outcomes. Douglass Academy High School, for example, spent over $90k per pupil in 2023-2024 and yet did not produce a single 11th-grade student proficient in reading or math.
An affordable alternative
There are ways to benefit students without driving residents out of the state with increasingly unbearable tax burdens. One possible approach is to reinvest savings from reducing administrative costs.
With this in mind, state Rep. Rita Mayfield, D-Waukegan, introduced the Classrooms First Act to establish a commission of teachers unions, school board associations, superintendent associations, education support districts and parents. The commission would deliberate on the number of school districts in the state, the optimal enrollment size for a district and which reorganization strategies would be most beneficial.
The commission, once established, is expected to reduce the total number of districts by at least 25%. Voters would have the final say before any districts are merged.
Although Mayfield’s bill unanimously passed the committee vote, it failed to advance after being rejected in a full vote on the House floor.
Mayfield’s approach emphasizes efficiency in school district organization and resource allocation as an alternative to burdening taxpayers. It deserves serious consideration.