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 flourished.
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 undercuts predictions of a stampede for the exits among residents of means.
At the same time, however, 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 from 3% to 5%:
- Over that time frame, the total number of federal tax filers in the state grew by just 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 in excess of $200,000 rose by 29%.
- The wealthiest got even wealthier, with 3,618 Illinoisans reporting $1 million-plus incomes in 2014, up 25% from four years earlier. Collectively, the adjusted gross income of those earning more than $1 million annually jumped 37.5% over the period.
- The income gulf widened, with those earning more than $100,000 annually accounting 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 that 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, a mismatch that speaks volumes about the predominant economic profile of those leaving Illinois.
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. Former Republican Gov. Bruce Rauner frequently complained that his own state was “in a death spiral” and that neighboring Indiana was “kicking our tails.”
The arguments are bubbling to a fresh boil after Pritzker recently 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. Unlike Illinois, 34 states impose income taxes with graduated rates.
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 on the political right, 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,” declared House Republican leader Jim Durkin of Westchester during an interview with a Downstate radio station, echoing an argument leveled by critics before that 2011 tax hike.
Not so, said Northwestern University tax expert Therese McGuire. “The narrative is around that taxes are killing the economy. That’s just a false narrative,” said 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.”
A revealing financial portrait of Illinois taxpayers, as well as when and where they move, is catalogued 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 headcount 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 35 years of age, 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 well beyond taxes and includes declining birth rates, slowing immigration, urban violence and economic shifts that increasingly center on job creation in the Chicago area at the expense of Downstate.
Nuance, however, is not the stuff of political narratives, which in the case of Illinois’ anemic population numbers often draw on anecdotes and cherry-picked data to attempt a cause-and-effect link to tax rates.
Michael Hicks, an economist at Indiana’s Ball State University who specializes in the effects of public policy on economic activity, says people base moving decisions the “same way they look for value in the purchase of food, clothing or other items.”
“The amenities that seem to matter most are good schools or school choice, thick labor markets, neighbors who are high income, and more highly educated, and other things that are often associated with cities or suburbs in large metro places,” Hicks said. “All things being equal, a higher tax will cause some people to leave, but all things aren’t equal.”
The BGA analysis focused on the years between 2006 and 2016, a period that spanned the height of the housing bubble, the Great Recession and the gradual economic recovery. That period also included the big 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.
Pritzker’s tax revamp is still on the drawing board and faces difficult procedural hurdles, so gauging the impact on Illinois’ economy and population is fraught with speculation. But the federal tax records paint a vivid picture of what happened after state taxes jumped in 2011.
The data also 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 which 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 out-migration loss of Illinois tax filers was 26,041. The loss was slightly less, 25,435, between 2011 and 2012.
Particularly telling are the results from neighboring Indiana, often pointed to by conservatives as a magnet for overtaxed Illinois residents. Yet the net outflow of Illinois tax filers to Indiana has fluctuated in a narrow range since the early 1990s, averaging a little over 2,200 a year.
The IRS data do show a leap in net out-migration from Illinois in most years after 2012. Yet the biggest jump occurred following the partial roll back of the tax hike, underscoring the difficulty in making cause-and-effect arguments about population loss and tax burdens.
The declining number of Illinois tax filings is most pronounced Downstate, records show. Macon County recorded a 6% drop in tax filers between 2011 and 2014, a period during which food processing giant ADM moved its headquarters and top executives from Decatur to Chicago. Even so, Macon experienced a 17% jump during those years in tax filers reporting income higher than $100,000. The tally of those reporting income below $100,000 fell 9%.
A similar dynamic played out in rural counties along or near the Indiana and Kentucky borders. Total filings dropped by a range of 1% to 6% between 2011 and 2014, while the percentage of those reporting six-figure incomes grew.
The falloff has been particularly sharp in sparsely populated Alexander County at the southern tip of the state, where census data show one-third of residents with incomes below the poverty line. The number of tax filers from Alexander fell nearly 15% between 2006 and 2016 even while there was a small uptick in higher earning residents, tax records show.
High-income earners saw similar gains in Chicago. In the zip code that includes the Lincoln Park and Logan Square neighborhoods, filings from those reporting more than $200,000 in income jumped 32% between 2006 and 2016, while filings under $50,000 declined more than 18%.
At the same time, the zip code that covers much of the Pullman and Roseland neighborhoods on the city’s far South Side saw the number of tax filers drop nearly 10% from 2006 to 2016, the federal tax data show. Roughly 80% of tax filers in that zip code report incomes of under $50,000, and more than half report incomes of less than $25,000.
The long-running political argument in Illinois is an echo of a battle in Minnesota, and it underscores the complexity of the tax debate. That state has the highest overall tax burden in the region, and in 2013 it added to that load by tacking on a surcharge for individuals earning more than $150,000. Critics warned of an exodus of the wealthy and overall damage to the state.
But from the 2013 to 2016 tax years, the number of Minnesota tax filers reporting income of $200,000 and more increased by 28%. The tax records also reveal a net outflow of residents reporting income of $100,000 and above, continuing a trend that predated enactment of the surcharge. While this was happening, Minnesota’s population grew 2%, a modest increase but one that exceeded all its Midwestern neighbors.
“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. 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.”