The Illinois Policy Institute’s Fact Finder series specifically aims
to debunk myths about public policy issues that affect Illinois. Download the full report here.
Fact: Low-tax states outperform high-tax states in attracting people, wealth, and jobs.
Illinois is losing the race for people, wealth, and jobs. According to the ALEC-Laffer State Economic Competitiveness Index, between 1999 and 2008 the state ranked 48th in net out-migration, 38th in personal income growth, and 48th in job growth. This poor performance record begs a review of the policy decisions that help shape Illinois’s economy.
One suggestion for “fixing” Illinois’s budget woes is the passage of significant tax increases. As revenue growth ultimately depends on how well the underlying economy performs, legislators must ask the following question: Would increasing Illinois’s tax burden help or hurt the effort to attract people, build wealth, and grow jobs? Highest-Taxed States vs. Lowest- Taxed States Nationwide data indicate that high tax burdens hurt economic growth. From 1998 to 2008, the ten lowest-taxed states economically outperformed the ten highest-taxed states on the following key measures (see Graphic 1 in the full report):
People. The ten lowest-taxed states had a 220 percent faster population growth rate than the ten highest-taxed states;
Wealth. The ten lowest-taxed states had a 15 percent faster personal income growth rate than the ten highest-taxed states; and
Jobs. The ten lowest-taxed states had a 58 percent faster employment growth rate than the ten highest-taxed states.
High taxes discourage productive behavior. Tax policy analyst Scott Moody notes that taxation comes with unseen costs, known as deadweight loss:
“Deadweight loss” is a term used by economists to describe economic activity forgone by consumers and producers because of the higher relative price of goods as a result of the tax. Taxpayers may respond to the proposed higher tax rates by reducing their work effort, lowering their consumption, or even leaving the state in order to avoid the higher tax bill. In other words, the very process of transferring resources from the private to the public sector results in a permanent loss of current and future economic output.
Conclusion Illinois needs more people, wealth, and jobs in order to turn the state’s economy around. Nationwide data from the last ten years show states that limit their tax burdens economically outperform those that don’t. Approving large tax increases would drive people, wealth, and jobs from the state at a time when Illinois can least afford it. Instead, lawmakers should look to emulate the low-tax, business-friendly policies of high-growth states.
