3 ways a ‘millionaire tax’ would hurt Illinois
Illinois voters on Nov. 5 will be asked whether they favor a “millionaire tax.” Here are three things to know about it: the tax can be easily avoided, it fails to provide stable revenue and it discourages or limits economic growth.
Illinois state leaders are asking voters Nov. 5 for their opinion about imposing an extra 3% tax on income over $1 million for property tax relief, but there are three things voters should know about this question state lawmakers hope will give them the nod to impose the tax for real.
So what are those three things? First, the tax can be easily avoided. Second, it fails to provide stable revenue. And third, it discourages or limits economic growth.
High-income individuals often have access to sophisticated tax planning strategies, enabling them to shift income across states or exploit loopholes, significantly reducing their tax burden. This limits the tax’s intended effect and burdens other taxpayers more.
Wealthy individuals are mobile and can quickly relocate to avoid higher taxes, leading to a shrinking tax base. While this mobility varies, every tax increase encourages more individuals to seek better opportunities elsewhere.
Taxing millionaires can deter investment and entrepreneurship, slowing economic activity and limiting job creation. As high earners move or reduce their investments, the local economy suffers and further exacerbates revenue shortfalls.
Besides those three issues, voters need to remember “millionaires” are not necessarily people in mansions. They often are mom-and-pop stores: 23,740 small businesses could be hit with a 61% hike in their marginal state income tax rate.
Costs and taxes heavily influence decision-making for small businesses. Higher taxes affect incentives, ultimately affecting innovation, investment and growth. Translated: the state economy and job markets could suffer.
While a millionaire’s income tax can raise money in the short term, it ultimately results in long-term losses.
Massachusetts shows the harms
A nonbinding question today may become public policy tomorrow. Massachusetts proved this when voters approved an additional 4% tax on income over $1 million in 2022. The effort began in 2018 with a ballot question like Illinois’.
The courts struck down the question for violating constitutional rules by combining taxation with allocation of funds for education and transportation. A few years later, a revised proposal was passed, imposing a substantial new burden with significant long-term consequences.
Massachusetts was already seeing residents leave, resulting in a net loss of $4.28 billion in taxable income between 2020 and 2021. A Boston University study warned if the trend continued, Massachusetts could lose $19.2 billion in adjusted gross income and $961 million in lost income taxes annually. What’s to prevent Illinois from seeing the same losses?
States such as North Carolina are capturing this migration with economic incentives – 6,781 people left Massachusetts for North Carolina in 2022. While Massachusetts raised its millionaire tax by 4%, North Carolina is lowering its income tax rate to under 4%, attracting more residents.
Illinois is already losing to neighbors
Illinois already struggles with economic competitiveness, ranking poorly across tax-related indexes: 37th in the State Business Tax Climate Index, 35th in the state taxation category of the Freedom in the 50 States index and 46th in taxes on the Social Mobility Index.
Like Massachusetts, Illinois is losing residents and revenue to other states – over 86,000 residents and $9.9 billion in 2022 alone. Increased taxation could accelerate this trend, pushing more people to nearby states with lower government burdens. Illinois’ neighbors – Indiana, Iowa, Kentucky and Missouri – have all cut income taxes and drawn residents from Illinois. In 2022, Illinois lost 17,223 residents to Indiana, 7,972 to Iowa, 2,734 to Kentucky and 4,723 to Missouri.
Politicians such as former Gov. Pat Quinn are pushing the millionaire income tax in Illinois, promising $4.5 billion in property tax relief. Those promises ignore the tax’s potential to hurt the state’s economic health by driving out businesses and high-income individuals, turning Illinois into a “business desert.”
While some argue the proposal targets only personal income, that is not clearly stated in the ballot question. The fact is, business owners and their companies are inherently connected.
A “millionaire’s tax” could significantly impact decision-making by discouraging new ventures and creating uncertainty for existing businesses. It distorts incentives for investing in businesses and punishes success. When business owners are deciding whether to expand or invest in Illinois, they cannot ignore the lure of other states offering lower taxes and greater stability.
The proposal introduces other forms of taxation that could disproportionately affect small businesses. A 2020 analysis highlighted how progressive income taxes could increase small business taxes to over 50.3%, putting undue pressure on these key job creators.
Small businesses, which often operate as pass-through entities, would see their owners’ incomes taxed at higher rates, significantly reducing profitability and stifling growth. This could result in fewer small businesses surviving, further shrinking the tax base and undermining Illinois’ long-term economic stability. Small businesses have long been Illinois’ most fertile source of jobs.
Only pension reform creates property tax relief
Property taxes are skyrocketing in Illinois because they are the primary funding source for the state’s ever-growing government pension liabilities. Over the years, public pensions have grown a $140 billion gap between what the state has and what it will eventually need from taxpayers to meet pension obligations. As these liabilities continue to grow, the pressure on property taxes increases. In the past five years alone, the average Illinois property tax bill has risen by $756, with some homeowners facing hikes of over $1,200.
Instead of addressing the underlying issue – the need for public pension reform – state lawmakers seem focused on finding temporary solutions to ease the property tax burden, such as this millionaire tax. But it only creates one tax to cover another and it is inefficient, falling billions short of providing significant property tax relief.
A recent study found the tax would raise between $2.3 billion and $3 billion annually, less than the projected $4.5 billion proponents claimed. More critically, it is well below the $6 billion to $9 billion needed to provide meaningful property tax relief.
As noted in the study, even the maximum revenue it could generate would barely budge the state’s pension crisis. That means continued tax increases as the pension crisis deepens with no plan to fix the real problem.
Illinois needs to amend its constitution so it can curb the ballooning public pension deficit. Asking voters about a “millionaire tax” is just a distraction so they can continue avoiding a pension fix, and a dangerous idea because it could hurt small businesses and drive out the very people lawmakers hope will be paying more in taxes.