Illinois has hurt its economy by piling on taxes since the Great Recession From Illinois Policy April 2017
State and local tax hikes in Illinois have hurt economic growth, lowered the standard of living, and contributed to out-migration.
One of the factors driving these outcomes is undoubtedly the onslaught of tax hikes Illinoisans have faced since the end of the Great Recession, coupled with a lack of political will to address spending drivers.
State and local officials have increased taxes as a way to bail out massive debts and budget shortfalls. Take, for example, the three largest taxing bodies in Illinois – the city of Chicago, Cook County and the state of Illinois. All of them have enacted significant tax increases since the end of the Great Recession.
According to a Chicago Tribune report, Chicago has enacted tax increases worth $1.9 billion per year since 2011, largely to try to shore up pension funds. On top of that, Cook County has approved $700 million worth of new sales and beverage taxes.
State government imposed income tax increases of 67 percent on individuals and 46 percent on corporations in 2011, which brought in an additional $7 billion per year. That increase partially sunsetted in 2015, leaving individuals with a 25 percent income tax increase and corporations with a 9 percent increase, compared with 2010’s rates. This equals an additional $3 billion in tax revenues per year.
These are the largest tax increases that have affected the state, but the tax increases have not been limited to these three units of government.
Economic research demonstrates that tax increases result in reduced economic growth
Tax increases, by definition, reduce the take-home wages of working people. The average Illinois household paid more than $1,000 in additional taxes to the state after the 2011 income tax increase, and Chicago households have forked over an additional $1,700 per year. The amount of the tax increase comes directly out of family and business earnings, leaving them with a lower standard of living than they would have had without the tax increase. Furthermore, taxes cause a “deadweight loss” that reduces the standard of living for the taxed populace as a whole. This explanation can be found in any economics 101 textbook.
Nearly every empirical study of taxes and economic growth published in a peer reviewed academic journal finds that tax increases harm economic growth. [Of 26 academic tax studies the Tax Foundation reviewed,] all but three of those studies … find a negative effect of taxes on economic growth. … Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption [i.e., sales] taxes and property taxes.
Foremost among the studies the Tax Foundation reviewed is one by Christina Romer, President Barack Obama’s former chief economic adviser. Romer concluded:
[T]ax increases are highly contractionary. … [A] tax increase of one percent of GDP lowers real GDP by roughly three percent.
In addition, an International Monetary Fund study of 170 cases of fiscal consolidation, which are episodes where governments seek to close budget deficits through tax increases or spending reductions, found that spending cuts are much less harmful to economic growth than are tax increases.
And a data-rich panel study looking at tax differences among states, and evaluating taxation as a percentage of state personal income, found a robust negative effect of taxation on personal income growth.
Against this backdrop, consider that Illinois’ state and local tax burden as a percentage of total state income was tied for the fifth-highest in the U.S. in fiscal year 2012, according to a Tax Foundation study.
Illinois lawmakers need to seek a new way forward
Academic literature on taxation should be sobering for Illinois, and speaks directly to the economic pain Illinoisans have faced through the state’s post-recession tax hikes. Illinois has gone too far in the direction of increasing taxes, and the prospect of more taxes would exacerbate out-migration and weak economic growth, risking the grave financial crisis about which Moody’s Investors Service analysts have warned.
Polling results released in October 2016 by the Paul Simon Public Policy Institute indicate that nearly half of Illinoisans want to leave the state, and taxes are the top reason. After the 2011 income tax increases, Illinois experienced a record number of both people and income leaving the state, and by a variety of measures experienced the worst wealth flight in the country.
To address its debt, unpaid bills and budget deficits, Illinois needs to reform its spending, first and foremost. All parties should put forward spending plans to balance the budget without a tax increase. At both the state and local levels, that means changing collective bargaining with government unions to align public employee compensation with what taxpayers can afford. Policymakers must analyze public pensions, Medicaid, education finances and prevailing wage laws for potential cost-saving changes. Illinois lawmakers should prioritize taxpayers and the neediest residents, and put everything else under consideration for spending changes.
Illinois lawmakers should admit the truth: Tax hikes harm families, businesses and the larger Illinois economy. This is borne out in economic theory, economic research, Illinois’ experience since the Great Recession, and the lives of everyday Illinoisans. At the end of the day, another tax hike on Illinoisans guarantees lower take-home pay, a lesser standard of living and a bleaker outlook for Illinois’ future.
