Proposed Illinois Tax Hikes are a Regional Outlier

Proponents of a higher graduated-rate income tax in Illinois have urged looking to neighboring states for ideas. This isn’t a bad idea. Just what are Illinois’ neighbors doing on taxes?

They’re taxing less, for starters. In Illinois, state and local taxes account for 9.3 percent of state income. The state and local taxes in Illinois’ six neighboring states account, in aggregate, for 8.0 percent of the income of those states.

Illinois’ neighboring states are also cutting their individual income taxes. Except for Iowa, all of Illinois’ neighbors have cut their income taxes since Illinois adopted its “temporary” income tax increases in 2011—and Iowa is on the verge of adopting a tax reform package that cuts individual income tax rates, possibly by the end of the week.

• Indiana reduced its broad-based, single-rate individual income tax from 3.4 to 3.23 percent as part of a broader multiyear package of tax reforms which has also seen the corporate income tax rate decline from 8.5 to 6 percent, with a further phasedown to 4.9 percent
• Iowa legislative leaders have reached an agreement which, among other changes, would consolidate the state’s nine-bracket individual income tax down to four brackets and reduce the top marginal rate from 8.98 to 6.5 percent over a few years, along with planned corporate income tax reductions and other reforms.
• Kentucky recently adopted legislation which replaces its graduated-rate individual and corporate income taxes, both with top rates of 6 percent, to single-rate taxes of 5 percent, among other reforms.
• Michigan reduced its single-rate income tax from 4.35 to 4.25 percent in 2012, a partial reversal of a 2007 tax hike.
• Missouri adopted a modest set of tax triggers which, thus far, have reduced the state’s top marginal individual income tax rate from 6 to 5.9 percent with a target of 5.5 percent, and lawmakers are actively considering several larger tax reform packages.
• Wisconsin reduced all individual income tax rates in 2012, lowering the top marginal rate from 7.75 to 7.65 percent, then made a further reduction to the bottom bracket in 2014, reducing that rate from 4.4 to 4 percent.

Over the same period, Illinois’ single-rate income tax was temporarily raised from 3 to 5 percent, then allowed to partially sunset to 3.75 percent before being raised to the current 4.95 percent rate. A 1.5 percent surtax on pass-through business income brings the rate on many small businesses to 6.45 percent. Now there are calls to amend the state constitution to allow graduated-rate income taxes, with proposals circulating to create a top marginal rate as high as 9.85 percent (11.35 percent on pass-through businesses).

If  tax increase proponents are really looking to neighboring states as they consider these options, they must be doing it with an eye to going in the opposite direction.