One federal tax change could determine whether Illinois sinks or swims

Austin Berg

Director of Content Strategy

Austin Berg
October 19, 2017

One federal tax change could determine whether Illinois sinks or swims

The choice is clear: Fix Illinois, or watch its downfall accelerate.

Illinois hasn’t had a balanced budget since 2001. A lot of that has to do with the nation’s worst pension crisis and warped spending priorities. But the state’s No. 1 budget problem is simple: people.

If Illinois just broke even on people coming and going to and from other states, there might not be much of a budget problem at all. Instead, the Land of Lincoln has lost more than a million residents and billions in potential tax revenue to other states on net over the last two decades.

And things could get much worse if state lawmakers don’t prepare for a major tax change being floated in Washington, D.C.

President Donald Trump’s proposed elimination of the state and local tax, or SALT, deduction is good policy. But it would put Illinois at a crossroads: Would the state continue down the same failed path or chart a new course toward prosperity?

Since no one knows which parts of Trump’s larger tax plan will become the law of the land, it’s important to consider the effects of removing the SALT deduction if Illinois continues to impose a heavy tax burden on Illinoisans.

As is, the SALT deduction partially masks the effects of Illinois’ high tax burden.

The highest property taxes in the nation don’t look quite as bad when a homeowner can deduct those bills from his or her federal income taxes. Ditto for the new state income tax hike passed this summer. But eliminating the SALT deduction would smash those rose-colored glasses.

In some Illinois counties, the average SALT deduction per tax return is more than $5,000 a year, according to the Tax Foundation. Removing the deduction would expose residents to the true cost of the tax-and-spend status quo in Illinois, as the federal government would no longer give preferential treatment to people paying a heavy sum in state and local taxes.

It’s true that other parts of Trump’s tax plan could make this change a wash for Illinoisans. Many could still see a tax cut overall. And again, eliminating the SALT deduction is good tax policy. It would simplify the tax code and limit the distortion of state and local choices.

But if Illinois lawmakers don’t act quickly, Illinoisans could still suffer for it.

Barring major reforms, the elimination of the SALT deduction would make Illinois’ tax climate even worse relative to other states. And it would accelerate wealth flight.

IRS data already show Illinois is driving away higher-income earners to greener pastures. If the choice to leave becomes even more lucrative, that problem will grow even worse. And that means residents who stick around would see more unbalanced budgets and more wrong-headed tax hikes in an attempt to fill the void.

The potential elimination of the SALT deduction presents an opportunity to get serious about changing Illinois’ tax climate. State and local tax choices start to mean a lot more when their consequences aren’t mitigated by the federal government.

But Illinois’ political leadership seems frightened by that prospect. Democratic U.S. Sen. Dick Durbin came out against the SALT change in an Oct. 16 press conference. He was bold enough to claim double taxation as his reason.

Illinoisans might hope Durbin would make the same argument about Illinois’ state-level death tax – a double tax if ever there was one and a major black eye should Trump’s proposed elimination of the federal death tax come to pass.

Families across the state could have used Durbin’s newfound concern for high taxes years ago. His pro-taxpayer rhetoric now rings hollow.

If politicians can’t get their fiscal house in order and enact competitive tax cuts at the state and local levels, a vanishing SALT deduction will harm Illinoisans.

The choice is clear: Fix Illinois, or watch its downfall accelerate.

Want more? Get stories like this delivered straight to your inbox.

Thank you, we'll keep you informed!