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.
Myth: Illinois is a "low tax" state.
Fact: Illinois's tax system places significant burdens on families and businesses.
Introduction Advocates of higher taxes often use the argument that “Illinois is a low tax state” to make the case for revenue increases. Even if this statement were true, it doesn’t follow that the government should dig deeper into the pockets of hard-working families and businesses. However, a closer look at the data challenges the underlying assumption that Illinois is a “low tax” state.
Americans pay taxes to many levels of government. Taking a holistic view that recognizes tax collection at the local, state, and federal levels, Illinois’s total tax burden is in the top third of all states. Illinoisans had to work until April 11th in 2010 to pay their combined federal, state, and local government tax bill.
At 101 days, this is the 14th-highest number of days spent working to pay taxes as compared to other states.
Illinois’s state and local tax burden per capita ranked 14th-highest in 2008, at $4,346. The “tax burden” measure focuses on the total amount residents pay in state and local taxes, as opposed to how much money state and local governments collect. As citizens will pay taxes to bodies both within and outside of their state of residency, this measurement provides a better understanding of which states’ residents are most burdened by state and local taxes by tallying tax payments in taxpayers’ home states.
All neighboring states, including Wisconsin, Iowa, Missouri, Kentucky, and Indiana, had lower per-capita tax burdens than Illinois in 2008.
As a percentage of state income, Illinois’s state and local tax burden of 9.3 percent (30th highest) ranked above Iowa (31st) and Mssouri (32nd), and below Wisconsin (9th) and Indiana (28th).
Many Illinois Taxes Are High Looking at specific revenue sources, many come with high rates and collections.
Illinois has high sales taxes. As of July 2010, Illinois has the 8th-highest combined state and average local sales tax rate at 8.22 percent—higher than all of its neighbors. 3 Chicago’s 9.75 percent sales tax ties for first among major U.S. metropolitan areas,4 and it depresses collections as consumers flee to nearby states.
Illinois has high excise taxes. Illinois has the sixth-highest state gas tax at 39 cents per gallon. Illinois has high taxes on beer, wine, and spirits compared to nearby states. With a $1-per-pack tobacco tax increase, as was passed by the Illinois Senate in 2010, Illinois would have a higher rate than four of the neighboring states.
Illinois’s corporate income tax is comprised of a 4.8 percent income tax and a 2.5 percent replacement tax. In 2008, Illinois’s corporate income tax collections per capita ranked 10th highest in the country.
Governor Quinn’s 2009 plan to raise the corporate income tax rate from 4.8 percent to 7.2 percent while retaining the replacement tax would have given Illinois the fourth-highest corporate income tax rate in the nation at 9.7 percent.
Illinois has a moderate personal income tax with a flat rate of three percent. In 2008, Illinois’s state income tax collections per capita ranked 31st highest, at $806.
“Tax Revenues As a Percentage of Personal Income” A statistic commonly cited by supporters of higher levels of government spending is “tax revenues as a percentage of personal income.” While this government-centric perspective (as opposed to taxpayer-centric) is a valid comparison measurement, it’s important to note that income levels can skew rankings. High-income states will show lower collections as a percentage of income than low-income states even if the actual tax bill is exactly the same.
Consider Illinois and Indiana. Looking at state revenue collections per capita, Illinois and Indiana are ranked 27th and 26th, respectively. Illinois collected $2,267 per person in 2009, while next-door Indiana collected $2,320 per person—just $53 more.17 Yet in the measurement of state tax revenues as a percentage of personal income, Indiana ranked twenty slots higher (17th highest) than Illinois (37th highest). This is largely attributable to income levels: Illinois ranks 13th highest for per capita income, at $46,693, while Indiana ranks 40th highest, at $37,279.18 Illinois is a higher-income state than Indiana. Chicago’s status as a world financial center drives up income figures, and this in turn affects the rankings. Conclusion: No Income Tax Hike Illinois is far from a “low tax” state. Illinois taxpayers face significant burdens at the federal, state, and local levels. The state’s highly visible sales, property, and excise tax burdens send the wrong message to price-sensitive consumers. In comparison, Illinois’s moderate personal income tax rate is the best competitive advantage in the state’s tax code. Increasing Illinois’s individual income tax—and thereby forfeiting one of the better incentives for people to work and live in the Prairie State—would be borderline reckless and highly unadvisable at best. Rather, Illinois should work to control spending and grow revenues naturally through economic growth as it seeks to balance its budget.