The problem

In 2011, Illinois Gov. Pat Quinn and the Illinois General Assembly used a lame duck session to pass a 67 percent personal income tax increase and a 46 percent corporate income tax rate increase. The governor promised the tax hike would help pay off the state’s massive liabilities and restore economic prosperity.

But the promises Quinn made regarding the tax hike have not come true. Since the hike, the state’s economy has remained stagnant and its fiscal reality has worsened. In fact, Illinois has had its credit rating downgraded several times since the tax hike, the unfunded pension liability has continued to increase and the state’s unpaid bills still amount to more than $6 billion.

Now some Illinois lawmakers want to make things worse. Many in Springfield are looking to renege on their promises to taxpayers by proposing to extend the 2011 income tax hike indefinitely, though the tax hike is set to sunset to 3.75 percent from 5 percent in 2015.

Even worse, some politicians want to burden the state’s economy and taxpayers further by instituting a progressive income tax.

It appears Illinois’ politicians have learned nothing from the failures of the 2011 tax hike.

Meanwhile, many of Illinois’ neighbors are generally reining in spending, lowering tax rates and solving long-term deficit problems. Some neighboring states have been proactive and reduced their tax burdens. Indiana is lowering its corporate tax rate from 8.5 percent to 6.5 percent. Other states, such as Iowa and Missouri, gained a competitive edge on tax-hiking Illinois by simply letting their current rates stand.

Illinois currently has a total tax burden in the top fourth of all states. While data for 2011 state and local tax burdens are not yet available, one thing is clear: Illinois isn’t just a high-tax state; it is an even higher-tax state than it was before.

Illinois has the 9th-highest tax burden of any state

Illinois had the ninth-highest tax burden in the country in fiscal year 2010 at $4,512 per capita, higher than all its bordering states.

The per capita tax burden on Illinois taxpayers is in the top third of all states. 



Illinois has the highest sales taxes of its neighbors

Illinois has high sales taxes. As of January 2013, Illinois had the 12th-highest combined state and average local sales tax rate in the country at 8.13 percent – higher than all bordering states. Chicago’s combined sales tax rate of 9.75 percent tied with Los Angeles as the highest sales tax among major U.S. metropolitan areas in 2010. Such high rates push consumers and businesses to flee to nearby states to buy and sell, depressing state tax collections. Every transaction made in Wisconsin, Missouri or Indiana by an Illinois resident is one less revenue opportunity for Illinois.



Illinois’ property taxes are in the top 10 nationwide

In 2009, Illinois’ median property taxes paid were seventh-highest in the nation at $3,507, exceeding all bordering states. The state also had the second-highest property taxes as a percentage of median home value at 1.91 percent, and the fifth-highest property taxes as a percentage of median homeowner income at 5.11 percent.



Illinois’ excise taxes are higher than most neighboring states

Illinois has high excise taxes compared to other states. Illinois has the fifth-highest state gas tax at 39 cents per gallon.



Illinois has high taxes on beer, wine and spirits as well. Illinois’ tax rate for beer is 23 cents a gallon, higher than all bordering states except Kentucky.



With the $1 increase in tobacco taxes in 2012, Illinois’ tobacco tax is now higher than all neighboring states except Wisconsin. An Illinoisan can save an astounding $1.81 per pack by shopping across the border in Missouri.



Illinois’ cell phone tax rate is also higher than all of its neighbors. Residents in nearby states pay an average of 6 percent less in taxes on their phone bills.



Illinois’ estate taxes are higher than most states

Illinois collected $243 million in estate and gift taxes in 2010. The state had the 14th-highest estate taxes per capita – higher than three of its five border states. Illinois’ estate taxes are even higher when measured per death: 13th-highest in the nation at $2,418. Only Iowa had higher estate taxes.



Chicago has the highest travel taxes in the nation

Thanks to Chicago’s high travel taxes, spending one night in the city is more expensive than all other top 50 travel destinations in the nation. For example, it is 81 percent more expensive to stay one night in Chicago than it is to stay one night in Fort Lauderdale, Fla. Businesses take such numbers into consideration when deciding meeting locations, where to hold events and how to spend travel dollars.



Illinois loses competitive advantage due to tax increases

Illinois had the 22nd-highest individual income tax collections per capita in fiscal year 2011, higher than all of its neighbors except Iowa and Wisconsin, according to the Tax Foundation’s adjusted data. That ranking encompasses only half of the 2011 income tax increase, so Illinois’ tax rankings will only worsen when the Tax Foundation revisits income tax rankings for 2012. The tax hike made the personal income tax more severe, increasing Illinois’ state income tax rate to 5 percent from 3 percent, a whopping 67 percent increase.

During consideration of the tax hike in January 2011, the Tax Foundation warned that the income tax increases would damage Illinois’ tax competitiveness and harm the state’s economy, saying: “The enacted tax increases will severely impact Illinois’ attractiveness to business and individuals. The state’s individual income tax, in particular, has been one of the best features of Illinois’ tax system.” That competitive advantage is now gone.



Illinois’ corporate tax rate is the 4th-highest in the developed world

In 2010, corporate income tax collections per capita in Illinois ranked 17th-highest in the country, according to the Tax Foundation’s adjusted numbers. In 2011, Illinois’ corporate income tax rate increased 47 percent, to 7 percent from 4.8 percent. Add to that the corporate personal property replacement tax of 2.5 percent and the total 2011 corporate tax rate becomes 9.5 percent. In terms of international competitiveness, the combined federal and state corporate income tax rate in Illinois is 41.2 percent, the fourth-highest in the country and in the industrialized world.



The 2011 income tax increases will worsen Illinois’ income tax ranking

Prior to the tax hikes, Illinois had the 22nd-highest personal income tax per capita and the sixth-highest corporate income tax per capita. Unfortunately, no final and adjusted numbers that take into account Illinois’ tax hikes have been released for 2011.

However, there is a proxy that can be used to estimate the impact of the tax increase. 2011 U.S. Census Bureau data, which are not final or adjusted, can be used to examine the relative movement in Illinois’ income tax ranking due to the tax increase.

According to 2011 U.S. Census Bureau data, the hike caused Illinois’ total state income tax collections per capita ranking to worsen 10 places from fiscal year 2010 to fiscal year 2011. Illinois’ ranking worsened more than any state in the Midwest, to
19th-highest in fiscal year 2011 from a ranking of 29th-highest in fiscal year 2010.

We don’t know yet how far Illinois’ final and adjusted ranking has fallen, but the census numbers indicate that it will fall significantly. By any measure, the tax increase has weakened Illinois’ competitiveness.

The solution

First, Illinois should repeal the 2011 income tax increases to help make the state more competitive both nationally and globally.

Second, Illinois should lower other taxes – such as sales, property and excise taxes – so that it has the lowest tax rates relative to its Midwest neighbors. This would help create tax competitiveness for Illinois in the region.

Third, Illinois should reject any attempts to adopt higher tax rates or progressive tax rate structures and, instead, work to abolish its personal and corporate income taxes entirely as part of a fundamental tax-system restructuring.

Why it works

Illinois’ tax code does not operate in a vacuum. Entrepreneurs, investors, workers, consumers and taxpayers, both inside and outside the state, constantly compare and contrast Illinois with states in the Midwest and across the nation.

Illinois has an unattractive tax code compared to both its neighbors and around the nation. No state has ever taxed its way to prosperity.

Illinois needs to restore confidence and can do this by repealing the 2011 tax hikes. This will send a strong signal that the state will not continue the failed tax policies of the past.

This would also force Quinn and the General Assembly to focus on reforming state programs and encourage a pro-growth environment. Finally, and most importantly for the long-term prosperity of the state, a repeal of the tax hike would allow the taxpayers of Illinois to keep more of their income to spend as they choose, and businesses to keep more profits to reinvest and hire more workers.

In the long term, abolishing income taxes would help Illinois achieve the goal of going from worst to first among its neighbors in economic growth, job creation and competitiveness.