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JULY 18, 2013 BUDGET & TAX

Illinois high-tax problem

Ted Dabrowski, Vice President of Policy, and John H. Klingner, Public Policy Research Assistant

The problem
In 2011, Illinois Gov. Pat Quinn and the Illinois General Assembly used a lame duck session to pass a 67 percent personal income tax increase and a 46 percent corporate income tax rate increase. The governor promised the tax hike would help pay off the states massive liabilities and restore economic prosperity.1 But the promises Quinn made regarding the tax hike have not come true. Since the hike, the states economy has remained stagnant and its fiscal reality has worsened. In fact, Illinois has had its credit rating downgraded several times since the tax hike,2 the unfunded pension liability has continued to increase and the states unpaid bills still amount to more than $6 billion.3 Now some Illinois lawmakers want to make things worse. Many in Springfield are looking to renege on their promises to taxpayers by proposing to extend the 2011 income tax hike indefinitely, though the tax hike is set to sunset to 3.75 percent from 5 percent in 2015. Even worse, some politicians want to burden the states economy and taxpayers further by instituting a progressive income tax. It appears Illinois politicians have learned nothing from the failures of the 2011 tax hike. Meanwhile, many of Illinois neighbors are generally reining in spending, lowering tax rates and solving long-term deficit problems. Some neighboring states have been proactive and reduced their tax burdens. Indiana is lowering its corporate tax rate from 8.5 percent to 6.5 percent.4 Other states, such as Iowa and Missouri, gained a competitive edge on tax-hiking Illinois by simply letting their current rates stand. Illinois currently has a total tax burden in the top fourth of all states. While data for 2011 state and local tax burdens are not yet available, one thing is clear: Illinois isnt just a high-tax state; it is an even higher-tax state than it was before. Illinois has the 9th-highest tax burden of any state Illinois had the ninth-highest tax burden in the country in fiscal year 2010 at $4,512 per capita, higher than all its bordering states.

Graphic 1. State and local tax burden per capita, fiscal year 2010 State Illinois Wisconsin Iowa Missouri Indiana Kentucky
Source: Tax Foundation5

State and local tax burden ($) 4,512 4,379 3,660 3,328 3,294 3,027

Rank 9 11 26 30 32 43

Graphic 2. State and local tax burden as a percentage of state income, fiscal year 2010 State Wisconsin Illinois Indiana Iowa Kentucky Missouri
Source: Tax Foundation6

State and local tax burden (%) 11.1 10.2 9.6 9.6 9.4 9.0

Rank 5 11 23 24 26 34

The per capita tax burden on Illinois taxpayers is in the top third of all states. No bordering state comes close to Illinois except Wisconsin, which is higher. And the 2011 income tax hike will only make Illinois rankings worse. Illinois has the highest sales taxes of its neighbors Illinois has high sales taxes. As of January 2013, Illinois had the 11th-highest combined state and average local sales tax rate in the country at 8.13 percent higher than all bordering states.7 Chicagos combined sales tax rate of 9.75 percent tied with Los Angeles as the highest sales tax among major U.S. metropolitan areas in 2010.8 Such high rates push consumers and businesses to flee to nearby states to buy and sell, depressing state tax collections. Every transaction made in Wisconsin, Missouri or Indiana by an Illinois resident is one less revenue opportunity for Illinois.

Additional resources: 190 S. LaSalle St., Suite 1630, Chicago, IL 60603 | 312.346.5700 | 802 S. 2nd St., Springfiled, IL 62704 | 217.528.8800

Graphic 3. Combined state and local sales tax rates, Jan. 1, 2013 State Illinois Missouri Indiana Iowa Kentucky Wisconsin
Source: Tax Foundation9

State rate (%) 6.25 4.23 7 6 6 5

Average local rate (%) 1.88 3.28 None 0.78 None 0.43

Combined rate (%) 8.13 7.51 7 6.78 6 5.43

Rank 11 14 20 27 37 44

Illinois property taxes are in the top 10 nationwide In 2009, Illinois median property taxes paid were seventh-highest in the nation at $3,507, exceeding all bordering states. The state also had the second-highest property taxes as a percentage of median home value at 1.91 percent, and the fifth-highest property taxes as a percentage of median homeowner income at 5.11 percent.10 Graphic 4. Measures of the property tax burden, fiscal year 2009-11 Median income for home owners ($) 68,578 62,494 58,613 56,517 56,350 50,545 Taxes as % of income 5.11 4.81 2.68 2.24 1.87 1.67 Median property taxes paid on homes ($) 3,507 3,007 1,569 1,265 1,051 843 Taxes as % of home value 1.91 1.74 1.36 1.00 0.88 0.76

State Illinois Wisconsin Iowa Missouri Indiana Kentucky

Rank 5 8 26 32 37 40

Rank 7 9 28 35 40 43

Median home value ($) 202,200 170,800 122,000 139,700 123,100 117,800

Rank 2 4 14 23 29 36

Source: U.S. Census Bureau data as presented by the Tax Foundation11

Illinois excise taxes are higher than most neighboring states Illinois has high excise taxes compared to other states. Illinois has the fifth-highest state gas tax at 39 cents per gallon. Graphic 5. State gasoline tax rates, Jan. 1, 2013 State Illinois Indiana Wisconsin Kentucky Iowa Missouri Excise tax ($ per gallon) 0.19 0.18 0.31 0.29 0.21 0.17 Other taxes and fees ($) 0.20 0.20 0.02 0.01 0.01 0.0 Total ($) 0.39 0.38 0.33 0.30 0.22 0.17 Rank 5 7 14 18 33 45

Note: The American Petroleum Institute (API) has developed a methodology for determining the average tax rate on a gallon of fuel. Rates may include any of the following: excise taxes, environmental fees, storage tank taxes, other fees or taxes and general sales tax. In states where gasoline is subject to the general sales tax, or where the fuel tax is based on the average sale price, the average rate determined by API is sensitive to changes in the price of gasoline. States that fully or partially apply general sales taxes to gasoline: CA, CT, GA, IL, IN, MI and NY. Source: American Petroleum Institute as presented by the Tax Foundation12 | 2

Illinois has high taxes on beer, wine and spirits as well. Illinois tax rate for beer is 23 cents a gallon, higher than all bordering states except Kentucky. Graphic 6. State alcohol taxes (per gallon), Jan. 1, 2013

State Kentucky Illinois Iowa Indiana Wisconsin Missouri

Source: Tax Foundation13

Beer ($) 0.76 0.23 0.19 0.12 0.06 0.06

Rank 7 27 31 42 48 49

Wine ($) 3.16 1.39 1.75 0.47 0.25 0.42

Rank 1 10 4 35 42 37

Spirits ($) 6.86 8.55 12.99 2.68 3.25 2.00

Rank 17 14 6 42 39 47

With the $1 increase in tobacco taxes in 2012, Illinois tobacco tax is now higher than all neighboring states except Wisconsin. An Illinoisan can save an astounding $1.81 per pack by shopping across the border in Missouri. Graphic 7. State tobacco taxes, June 1, 2013

State Wisconsin Illinois Iowa Indiana Kentucky Missouri

Tobacco excise tax ($ per pack) 2.52 1.98 1.36 1.00 0.60 0.17

Tax difference between Illinois and bordering state ($) -0.54 0.62 0.98 1.38 1.81

Rank 8 15 24 31 39 50

Note: Tax is on a standard 20-pack of cigarettes Source: Tax Foundation14

Illinois cell phone tax rate is also higher than all of its neighbors. Residents in nearby states pay an average of 6 percent less in taxes on their phone bills. Graphic 8. State and local cell phone tax rates, July 1, 2012 State Illinois Missouri Indiana Kentucky Iowa Wisconsin
Source: Tax Foundation15

Illinois estate taxes are higher than most states Illinois collected $243 million in estate and gift taxes in 2010. The state had the 14th-highest estate taxes per capita higher than three of its five border states. Illinois estate taxes are even higher when measured per death: 13th-highest in the nation at $2,418. Only Iowa had higher estate taxes. Graphic 9. State estate taxes per death, June 1, 2010 State Iowa Illinois Indiana Kentucky Wisconsin Missouri Taxes per death ($) 2,451 2,418 2,358 887 19 5 Rank 12 13 14 18 29 35

Avg. State & Local Tax Rate (%) 15.9 14.3 10.9 10.5 8.0 7.2

Rank 5 7 22 24 34 42

Source: Commission on Government Forecasting and Accountability16 | 3

Chicago has the highest travel taxes in the nation Thanks to Chicagos high travel taxes, spending one night in the city is more expensive than all other top 50 travel destinations in the nation. For example, it is 81 percent more expensive to stay one night in Chicago than it is to stay one night in Fort Lauderdale, Fla.Businesses take such numbers into consideration when deciding meeting locations, where to hold events and how to spend travel dollars. Graphic 10. Combined single-day travel taxes in top 50 travel markets, 2012 City Chicago, IL New York, NY Boston, MA Kansas City, MO Seattle, WA Portland, OR Detroit, MI West Palm Beach, FL Fort Myers, FL Fort Lauderdale, FL Combined single day travel taxes ($) 40.31 37.98 34.83 34.58 34.43 22.45 22.37 22.21 22.21 22.21 Rank 1 2 3 4 5 46 47 48 49 50

Graphic 11. State individual income tax collections per capita, fiscal year 2011 State Wisconsin Iowa Illinois Kentucky Missouri Indiana
Source: Tax Foundation20

State individual income tax collections ($) 1,128 933 873 784 755 705

Rank 10 17 22 26 30 32

Illinois corporate tax rate is the 4th-highest in the developed world In 2010, corporate income tax collections per capita in Illinois ranked 17th-highest in the country, according to the Tax Foundations adjusted numbers.21 In 2011, Illinois corporate income tax rate increased 47 percent, to 7 percent from 4.8 percent. Add to that the corporate personal property replacement tax of 2.5 percent and the total 2011 corporate tax rate becomes 9.5 percent. In terms of international competitiveness, the combined federal and state corporate income tax rate in Illinois is 41.2 percent, the fourth-highest in the country and in the industrialized world.22 Graphic 12. State corporate income tax collections per capita, fiscal year 2011 State Wisconsin Illinois Kentucky Indiana Iowa Missouri
Source: Tax Foundation23

Note: Overall travel tax burden includes general sales tax and discriminatory travel taxes on car rentals, hotel stays and meals. Discriminatory travel taxes are targeted at travelers or travel-related areas and go above the general sales tax. Source: Global Business Travel Association17

State corporate income tax collections ($) 149 144 119 110 82 54

Rank 16 17 24 27 36 41

Illinois loses competitive advantage due to tax increases Illinois had the 22nd-highest individual income tax collections per capita in fiscal year 2011, higher than all of its neighbors except Iowa and Wisconsin, according to the Tax Foundations adjusted data.18 That ranking encompasses only half of the 2011 income tax increase, so Illinois tax rankings will only worsen when the Tax Foundation revisits income tax rankings for 2012. The tax hike made the personal income tax more severe, increasing Illinois state income tax rate to 5 percent from 3 percent, a whopping 67 percent increase. During consideration of the tax hike in January 2011, the Tax Foundation warned that the income tax increases would damage Illinois tax competitiveness and harm the states economy, saying: The enacted tax increases will severely impact Illinois attractiveness to business and individuals. The states individual income tax, in particular, has been one of the best features of Illinois tax system.19 That competitive advantage is now gone. | 4

Graphic 13. Comparing combined U.S. and state corporate income tax to OECD* countries, 2011

State/country Iowa Pennsylvania Minnesota Illinois Indiana Wisconsin United States Missouri Kentucky Japan France

Federal tax rate (%) 35 35 35 35 35 35 35 35 35 30 34.43

Top state/provincial tax rate (%) 12 9.99 9.8 9.5 8.5 7.9 (avg) 6.56 6.25 6 (avg) 11.51 -

Combined federal and state tax rate (%) (adjusted)** 41.6 41.5 41.4 41.2 40.5 40.1 39.3 39.1 38.9 34.54 34.43

State rank Country rank 1 -2 -3 -4 -12 -18 --1 33 -35 --2 -3

*Organization for Economic Cooperation and Development **The combined rate is adjusted for federal deduction of state tax. Iowa and Louisiana are also adjusted for federal deductibility. Source: Tax Foundation24

The 2011 income tax increases will worsen Illinois income tax ranking Prior to the tax hikes, Illinois had the 22nd-highest personal income tax per capita and the sixth-highest corporate income tax per capita. Unfortunately, no final and adjusted numbers that take into account Illinois tax hikes have been released for 2011. However, there is a proxy that can be used to estimate the impact of the tax increase. 2011 U.S. Census Bureau data, which are not final or adjusted, can be used to examine the relative movement in Illinois income tax ranking due to the tax increase. According to 2011 U.S. Census Bureau data, the hike caused Illinois total state income tax collections per capita ranking to worsen 10 places from fiscal year 2010 to fiscal year 2011. Illinois ranking worsened more than any state in the Midwest, to 19th-highest in fiscal year 2011 from a ranking of 29th-highest in fiscal year 2010.25 We dont know yet how far Illinois final and adjusted ranking has fallen, but the census numbers indicate that it will fall significantly. By any measure, the tax increase has weakened Illinois competitiveness.

Why it works
Illinois tax code does not operate in a vacuum. Entrepreneurs, investors, workers, consumers and taxpayers, both inside and outside the state, constantly compare and contrast Illinois with states in the Midwest and across the nation. Illinois has an unattractive tax code compared to both its neighbors and around the nation. No state has ever taxed its way to prosperity. Illinois needs to restore confidence and can do this by repealing the 2011 tax hikes. This will send a strong signal that the state will not continue the failed tax policies of the past. This would also force Quinn and the General Assembly to focus on reforming state programs and encourage a pro-growth environment. Finally, and most importantly for the long-term prosperity of the state, a repeal of the tax hike would allow the taxpayers of Illinois to keep more of their income to spend as they choose, and businesses to keep more profits to reinvest and hire more workers. In the long term, abolishing income taxes would help Illinois achieve the goal of going from worst to first among its neighbors in economic growth, job creation and competitiveness.

The solution
First, Illinois should repeal the 2011 income tax increases to help make the state more competitive both nationally and globally. Second, Illinois should lower other taxes such as sales, property and excise taxes so that it has the lowest tax rates relative to its Midwest neighbors. This would help create tax competitiveness for Illinois in the region. Third, Illinois should reject any attempts to adopt higher tax rates or progressive tax rate structures and, instead, work to abolish its personal and corporate income taxes entirely as part of a fundamental tax-system restructuring. | 5


Pat Quinn. Speech. Post Tax Hike Press Conference. Press Room, 12 Jan. 2011,

2 Moodys Gives Illinois worst credit rating innation, CBS News, Jan. 6, 2012, 3 4

Office of the State Comptroller.

Governor signs legislation to lower Indianas corporate tax rate to 6.5 percent, May 11, 2011,
5 ed. Scott Drenkard, Facts & figures handbook: How does your state compare? Tax Foundation, March 8, 2013, 6 7 8

Ibid. Ibid.

Lawrence Summers, Major metropolitan areas sales tax rates. Tax Foundation, Aug. 19, 2010,

Scott Drenkard, State and Local Sales Tax Rates Midyear 2013 Tax Foundation, August 28, 2013,

Tax Foundation, Property taxes on owner-occupied housing by state, 2004 2009, Sept. 28, 2010,
10 11


12 ed. Scott Drenkard, Facts & figures handbook: How does your state compare? Tax Foundation, March 8, 2013, 13 14 15

Ibid. Ibid. Ibid.

16 Illinois Estate Taxes June 2012 Update, Commission on Government Forecasting & Accountability, June 2012,

Global Business Travel Association, GBTA Reveals Best and Worst Travel Taxes in Top 50 U.S. Destinations, Sept. 10, 2012, foundation/pressreleases/Pages/rls_091012.aspx.
17 18 Census data should be corrected for the impact of Illinois income taxes on Illinois residents, The Tax Foundation has adjusted the data to exclude revenue from non-state residents, but they do not include local-government tax collections. 19 Kail Padgittv and Joseph Henchman, Illinois Approves Sharp Income Tax Increase, Fourth-Highest Corporate Tax Rate, Tax Foundation, Jan. 13, 2011, 20 ed. Scott Drenkard, Facts & figures handbook: How does your state compare? Tax Foundation, March 8, 2013, 21 22


Scott Hodge, Illinois corporate tax hike inches US closer to #1 ranking globally. Tax Foundation, Jan. 14, 2011,
23 ed. Scott Drenkard, Facts & figures handbook: How does your state compare? Tax Foundation, March 8, 2013, 24 Scott Hodge, Illinois corporate tax hike inches US closer to #1 ranking globally. Tax Foundation, Jan. 14, 2011, 25 2011 Annual Survey of State Government Tax Collections, US Census Bureau,, and the Federal Reserve Bank of St. Louis,

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