The facts on Illinois taxes
With the huge budget hole created by the recent 25 percent tax cut to both Illinois’ personal and corporate income tax rate, lawmakers must make critical decisions about whether to make deep cuts or raise revenue. In the past, inaccurate information has circulated about Illinois’ tax levels compared with other states and about the effect of state tax levels on the choices families and businesses make.
It is important to set the record straight. Even before the income tax rate expiration, taxes (and spending) in Illinois were not out of line with other states. Other states’ experiences also make clear that cutting taxes won’t lead to higher economic growth.
Here are the facts:
• Pre-expiration tax and spending levels in Illinois were not out-of-line with other states. Fiscal Policy Center analysis shows that, using the best measure of percentage of personal income, Illinois was in the middle of states in state taxes collected (22nd) and near the bottom of states in state spending (37th) in 2012. This was after the 2011 increase in income tax rates. This measure is the best way to compare states, because it corrects for differing levels of residents’ income and costs of living among the 50 states. Analyses that come to a different conclusion use flawed methodology that compare apples-to-oranges, rather than this apples-to-apples comparison.
• There is no consensus among experts that state tax cuts improve economic growth. A recent exhaustive review of academic literature shows that there is simply no consensus among economists that state tax cuts lead to economic growth. Claims that cutting state taxes will increase economic growth are based on ideology, not evidence – as Kansas’ disastrous experience with tax cuts clearly demonstrates. As the Fiscal Policy Center has previously explained, there are good reasons why a connection between tax cuts and economic growth doesn’t exist, including:
– To balance the state budget, any revenue losses mean cuts to services, resulting in less state economic activity.
– Less revenue means less money invested in areas critical for economic growth such as education, transportation infrastructure, and public safety.
– Businesses expand when they have increased demand for goods or services, not when they pay less in taxes.
– Much of the money from reduced corporate taxes goes out of state in the form of payments to out-of-state shareholders, suppliers and employees.
– Cutting the corporate tax does virtually nothing to incentivize job creation in Illinois. This is because Illinois calculates corporate income tax based on Illinois’ sales, not where businesses have their factories, distribution facilities or headquarters. For example, Walgreens wouldn’t reduce its Illinois corporate income tax bill by moving its headquarters out of state. Instead, it would need to sell less in Illinois – hardly an attractive proposition.
• State taxes are rarely the reason for people move to a new state. Claims that people move between states because of taxes are deeply flawed. Florida, which does not have an income tax, is often cited as an example of people moving to low-tax states. But between 1993 and 2011, Florida lost population to 15 states, including 11 that have an income tax.
Other factors – the availability of jobs, warm climate, cheap housing, and high-quality public services – are much more important than tax rates. Cutting taxes will only drain resources away from the types of investments that are proven to attract people such as improving public schools, upgrading roads, bridges and public transit, and enhancing public safety.
State tax cuts and economic growth only work as sound bites. Due to the recent decrease of income tax rates, the state will lose over $2 billion in revenue this fiscal year and over $5 billion next fiscal year. To balance the budget in fiscal year 2016 given this massive loss of revenue, the Fiscal Policy Center calculates that lawmakers will need to cut non-mandated General Funds spending an average of at least 25 percent, which would devastate Illinois’ public schools, colleges and universities, and safety net programs such as those that prevent homelessness. Ultimately, the claim that Illinois can cut taxes and make vital investments, pay down the backlog of unpaid bills and improve its lowest-in-the-nation credit rating relies on flimsy evidence and fanciful thinking. To build a stronger Illinois, members of the General Assembly and Governor Rauner need to work together to raise the resources our state needs.
David Lloyd is director of the Fiscal Policy Center at Voices for Illinois Children, firstname.lastname@example.org, 312-516-5557.