Across the Nation

Illinois Income Tax: The Myths and Realities of Tax Cuts

By  | 

The temporary increase that raised Illinois’ income tax rate to 5 percent expired on December 31, 2014. The tax rate before the increase was 3 percent, and even though the new rate is higher at 3.75 percent, critics argue that this Illinois income tax cut may contribute to a significant budget shortfall for the state, which is already enduring $111 billion in pension debt and an additional $6 billion in unpaid bills.

According to The Huffington Post, however, Illinois Governor Bruce Rauner’s 2016 budget, introduced in February, 2015, “stands as the first plan in over 10 years that puts the state on track to pass a truly balanced budget.”

Though the financial situation in Illinois is compromising, income tax cuts can mean positive changes for a state like Illinois. Here are some thoughts about the tax cut and its possible impact on the state’s middle class.

The Myths and Realities of Tax Cuts

According to The Wealth of States, the connection with tax cuts and public service cuts is oftentimes falsely correlated. The authors state, “A cut in tax rates will lead to more jobs and higher incomes, thereby reducing the need for welfare, unemployment benefits, and income supplements.”

Too often, higher tax rates, like the recently reduced 5 percent Illinois rate, are associated with better school systems, more police to protect you, and better highways in your state. However, The Wealth of States authors argue that “higher tax rates are not synonymous with higher dollar tax revenue.”

The book goes on to state, “People will choose more work over nonwork; people will choose staying in the state rather than leaving.” And they are leaving: Illinois lost a total of $31.27 billion in adjusted gross income (AGI) between 1992 and 2011 to non-income-taxing states such as Florida ($7.2 billion AGI lost) and Texas ($2.4 billion AGI lost), among others. And it is argued that higher rates would only expedite this outward migration of residents and income.

Appropriation Increases

Though many programs are experiencing a reduction in funding, the following is a list of the top 10 funding increases that are proposed by Gov. Rauner’s 2016 budget, according to

  • Department of Healthcare and Family Services: $600 million increase
  • Prison Review Board: $1.6 million increase
  • Department on Aging: over $140 million increase
  • State Board of Education: $220 million increase
  • Department of Corrections: $2 million increase

These increases don’t even include the $201 million in new line-item appropriations listed in the proposal.

The Oklahoma Example

There are many examples of what a tax cut can do for a state over time. Look at Oklahoma, for instance. According to The Wealth of States, from 1997 to 2004, the years prior to Oklahoma’s income tax cut, gross state product (GPS) growth for Oklahoma was at 43 percent in comparison to overall U.S. growth at 43 percent. After the income tax cut, from 2004 through 2012, the state grew by 43 percent GSP versus the U.S. growth of 32 percent. For some years, Oklahoma even outperformed neighboring Texas in GSP, a state that boasts no income tax.

A state in the red when it comes to debt will always draw national attention, for with it comes difficult decisions, hard-hitting budget cuts, and a great deal of speculation. History shows that tax decreases can lead to economic prosperity for states such as Oklahoma and eventually, Illinois. However, this means keeping income in the state, where it belongs.

Roger Wohlner is an experienced financial advisor based in Arlington Heights, Ill.  Roger contributes to his own popular finance blog, The Chicago Financial Planner, where he writes about issues concerning financial planning, investments and retirement plans.  The blog received over 50,000 page views during the most recent 30 days.   In addition his work has been featured on Investopedia, US News & World Report, Yahoo! Finance, Equifax Finance Blog and other publications. Roger is available for additional freelance financial writing assignments.