by Elizabeth Austin, Innovation Illinois VP for Policy
in The Southern Illinoisan 10/25/15
Which state has the highest taxes in the Midwest? Not Illinois, that’s for sure.
A recent article from the Illinois Policy Institute claimed otherwise, citing “recent research.” But that research was actually based on tax collections from Fiscal Year 2013, when the Illinois state income tax rate was 5 percent. Today – in Fiscal Year 2016, more than two years later – the state income tax rate has dropped to 3.75 percent. So if you look at tax collections in the first six months of this year, under the new rate, Illinois’ state taxes collections come out to $1,597 per person – more than $60 lower than Wisconsin’s $1,661. That’s just a fact.
But beyond that basic inaccuracy, that letter simply ignored some fundamental facts about state taxes – the first being that comparing state tax burdens is like trying to compare apples and mashed potatoes.
Take Indiana. Their income tax rate is a flat 3.3 percent — which looks pretty good next to Illinois, right? But in Indiana, almost every county imposes its own income tax – which can range up to almost 3 percent, for a total income tax rate of 6.3 percent. That’s a whopping 68 percent higher than Illinois.
And while it’s true that people in Illinois pay more in income taxes, per person, than people in Missouri, there’s a very good reason for that: We make more money. The average per capita income in Illinois is $29,666 – above the national average, and substantially higher than the Missouri per capita income of $25,649. So if you want to move to Missouri and pay less, remember that’s because you’re likely to make less.
Then there’s the huge issue of comparing Illinois’ regressive flat income tax rate with our neighboring states’ progressive rates. In Wisconsin, people in the highest income bracket pay a top rate of 7.65 percent. Iowans pay almost 9 percent on taxable income over $68,000. And people in Minnesota pay a hefty 9.85 percent on taxable income of $154,951 and above.
Here’s the real point – when you start cherry-picking statistics on state tax rates, you can prove just about anything you want. The real task is figuring out the best, fairest way for a state government to raise the revenues necessary to pay for the services that its people demand. And you can’t develop smart, effective tax policy based on a misleading, simplistic and out-of-date chart.
But if you could, I’d choose one from the Tax Foundation (that same place that Illinois Policy Institute cited) that ranked the combined state and local tax burden in every state. Illinois comes in at number 13 – compared with Wisconsin, which had the fifth-highest tax burden in the nation.