Will wealthy leave Illinois if graduated income tax happens? It didn't happen with last tax hike

  • Gov. J.B. Pritzker faces reporters Tuesday after releasing language for a graduated income tax constitutional amendment during a news conference in his office in Springfield.

    Gov. J.B. Pritzker faces reporters Tuesday after releasing language for a graduated income tax constitutional amendment during a news conference in his office in Springfield. Jerry Nowicki/Capitol News Illinois

By Tim Jones and Bob Secter
Better Government Association
Updated 4/10/2019 5:52 AM

When Illinois' income tax rate jumped a record 67% earlier this decade, critics warned it would drive away the wealthy who invest in businesses and jobs.

Instead, IRS data show, the better-off stayed, and their numbers grew.


Similar arguments are now being raised by opponents of Gov. J.B. Pritzker's push for a new and steeper tax hike on the wealthy. But if past is prologue, a trove of federal data on Illinois taxpayers challenges predictions of a stampede for the exits among residents of means.

At the same time, a BGA analysis of the records shows that the big tax hike coincided with a steep drop in the number of low- and modest-income taxpayers, with the biggest impact downstate and in some minority neighborhoods in Chicago.

The federal records reveal robust growth in the numbers of Illinois tax filers with incomes of $100,000 or greater from 2011 through 2014 when lawmakers temporarily boosted the state's flat income tax rate to 5% from 3%.

Over that time, the total number of federal tax filers in the state grew by 9,000, an almost imperceptible one-tenth of 1%. But the number of filers reporting adjusted gross income between $100,000 and $200,000 grew by 16%, while the number reporting income over $200,000 rose by 29%.

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The wealthiest got even wealthier, with 3,618 Illinoisans reporting $1 million-plus incomes in 2014, up 25% from four years earlier.

Those earning more than $100,000 annually accounted for all the increase in collective earnings among Illinois taxpayers between 2006 and 2016. Meanwhile, more than 70% of Illinois tax filers reported annual income of less than $75,000 in 2016, and there were 300,000 fewer of them that year than in 2006.

It's possible some data fluctuations can be accounted for by taxpayers of modest means doing better and moving into higher income brackets. Also worth noting is that many poor and elderly earn so little that they are not required to submit returns and aren't reflected in the total number of Illinois filers, which stood at 6.1 million in 2016.

Those caveats aside, the falloff in low- and medium-income federal tax filers far exceeds the growth in the ranks of those at the top.

Population loss, tax issues and the poor condition of state finances have become intertwined of late, with many conservatives treating it as a given that Illinois' steep debt and tax structure, including high property taxes, was driving out jobs and people.


The arguments have bubbled to a fresh boil after Pritzker unveiled details of his proposal to replace the current 4.95% flat tax with a graduated schedule of rates that would charge more to higher-income taxpayers.

Illinois' new Democratic chief executive says the changes, requiring a constitutional amendment before any rate adjustment, would raise billions, stabilize precarious finances and make income taxes fairer. Critics, however, say graduated hikes would be shortsighted by driving away the wealthy who already pay a large share of taxes and make business investments that lead to jobs.

"The high-wealth earners will leave Illinois," House Republican leader Jim Durkin of Westchester said during an interview with a downstate radio station, echoing an argument leveled by critics before the 2011 tax hike.

Not so, said Northwestern University tax expert Therese McGuire, a professor at the Kellogg School of Management whose specialty is state and local government finance. "There really, really is not strong evidence that differential tax rates in one state are an important factor in the growth of an economy," she said.

A revealing financial portrait of Illinois taxpayers, as well as when and where they move, is cataloged in an annually updated encyclopedia of information gleaned from federal tax returns and published by the Internal Revenue Service. Called Statistics of Income, the report aggregates details about federal tax filers broken down by states, counties and ZIP codes, making it possible to compare Illinois across its parts as well as with other states.

The IRS data, based on a hard count of tax filers, is separate from population estimates issued annually by the United States Census Bureau, which in recent years have pointed to an erosion in the head count of all Illinois residents. The tax records, however, do give statistical signals about where that population loss is centered, and it's not among the wealthy.

The portrait of those who left the state during the four years of the income tax hike is dominated by the young and those with modest earnings. Records show about 55% of departees were under age 35, and more than 60% reported incomes of less than $50,000.

Many economists and demographers see the causes of population loss as a complex mix of factors that goes beyond taxes and includes declining birthrates, slowing immigration, urban violence and economic shifts that increasingly center on job creation in the Chicago area at the expense of downstate areas.

The BGA analysis focused on the years from 2006 to 2016, a period that spanned the height of the housing bubble, the Great Recession and the gradual economic recovery. That period also included the 2011 Illinois tax hike, which partially rolled back in 2015 to 3.75% before rising again in mid-2017. Any impact from that latest increase came too late to be reflected in the federal statistics.

The data show Illinois has indeed been losing taxpayers to other states, but the phenomenon is decades old and predates more recent debates over comparative tax burdens.

Dating back to at least 1990, the records show, the top destinations for Illinois migrants have been Florida and Texas, states in the Sun Belt that have no income tax, and California, where state income tax rates are among the highest in the U.S. A lot of people have moved out of Illinois over the decades, but a lot of people also moved in, the records show.

The difference between those leaving and those coming -- the net outflow -- was not substantially different during the first two years of the big tax hike than it had been a decade and more earlier when taxes were far lower. For instance, records show that between 1997 and 1998 the net loss of Illinois tax filers was 26,041. The loss was slightly less, 25,435, between 2011 and 2012.

The IRS data do show a leap in net out-migration from Illinois in most years after 2012. Yet the biggest jump occurred after the partial rollback of the tax hike, underscoring the difficulty in making cause-and-effect arguments about population loss and taxes.

"I don't think the level of taxes is one of the main factors that's hurting the economy of the city of Chicago or the state of Illinois," said Northwestern's McGuire, noting that state taxes in Wisconsin and Iowa are higher than Illinois. What they have, she said, is tax certainty.

"When businesses don't know, they pull back. They don't invest, they don't hire people because they don't know what's happening next," she said. "Whether or not it's a high tax or a low tax, they want certainty in the future because they know how to work around that."

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