Low-income Illinoisans have the third-highest state and local tax burden in the nation, according to a new study by the Institute on Taxation and Economic Policy (ITEP) and the Fiscal Policy Center at Voices for Illinois Children.
The study, which examined the distribution of all major state and local taxes by income group in all 50 states and the District of Columbia, showed that the poorest Illinois residents currently pay almost three times more in taxes as a percent of their income compared to the richest Illinoisans.
Illinois' effective tax rates by income group are 13.2 percent for those in the bottom 20 percent of the income scale, 10.8 percent for the middle 20 percent and 4.6 percent for the top 1 percent, according to the study.
States with higher tax burdens on the poor are Washington at 18.6 percent and Hawaii at 13.4 percent.
Overall, Illinois was ranked fifth on the study's "Terrible 10" list of states with the most regressive tax systems, behind South Dakota, Texas, Florida and Washington. Illinois landed on the list due to its use of a flat-rate income tax, under which all state residents are taxed at the same rate despite their income, and its relatively high reliance on sales and property taxes, said ITEP's Executive Director Matt Gardner.
The state's flat income tax rate for individuals fell from 5 percent to 3.75 percent on January 1, when the temporary income tax hike rolled back. It remains to be seen what state lawmakers and Gov. Bruce Rauner will do with the income tax as they work to address the state's fiscal issues, including a multi-billion budget deficit.
"As a percentage of their income, the poor pay more and the rich pay less in taxes here than in any of our neighboring states," David Lloyd, director of the Fiscal Policy Center at Voices for Illinois Children, said in a statement. "That's what happens when taxes are not based on ability to pay, but rather on a flat rate."
Improving tax fairness is an "economic imperative" for Illinois and other states, the study argues.
"The vast majority of states allow their very best-off residents to pay much lower effective tax rates than their middle- and low-income families must pay, so when the richest taxpayers grow even richer, these exploding incomes hardly make a ripple in state tax collections," the report reads. "And when the same states see incomes stagnate or even decline at the bottom of the income distribution, it has a palpable, devastating effect on state revenue ... Hitching your state's funding of investments to those with a shrinking share [of] income is not a path to a sustainable, growing revenue stream."
To increase tax fairness in Illinois, Gardner said the state could move to a graduated income tax system that applies higher rates to larger incomes and lower rates to smaller incomes.
A constitutional amendment is needed for the state to switch from a flat income tax rate to a progressive system. To do this, both chambers of the general assembly have to pass legislation by a three-fifths majority to put a referendum on the ballot. A graduated income tax amendment measure was discussed, but failed to garner enough support in the state legislature last year.
"It's definitely the case that policy makers in Illinois have been asking the right questions," Gardner said. "The fact that there's this talk of a constitutional change, that's the conversation that Illinois needs to be having as policy makers think of ways to get Illinois off the list of the states that have the most unfair tax systems. I think there's a healthy discussion underway, and my hope is that the discussion on income tax reform would continue."
There are, however, more immediate ways to improve tax fairness in Illinois, including increasing the value of the Earned Income Tax Credit and making it available to more people, Gardner said.
"Expanding the EITC is a no-brainer if the goal is to reduce tax unfairness at a minimal cost," he stressed.
Another option is expanding property tax credits for low- and middle-income Illinoisans.
"Right now, Illinois has what's called a 'circuit breaker' property tax credit that's available to low-income seniors," Gardner explained. "Making that available to homeowners and renters of all ages would be a fantastic step towards a fairer state tax system. But the holy grail really remains having a more progressive personal income tax."