Citizen's Guide to the Illinois State Tax System:
What Every Concerned Illinoisan Should Know

Part I: Illinois Tax Basics

Personal Income Tax

The income tax in Illinois is a constitutionally mandated flat rate with poorly targeted exemptions. This means that no matter how much money you make in a year, the rate is the same. This system substantially benefits wealthy people who generally have a large amount of disposable income that could go towards taxes. Lower-income taxpayers need every penny to cover food and housing costs and have less money to spend on taxes.

The state relies less on income taxes than almost all of the 41 states that collect them and Illinois income tax is among the slowest-growing income taxes in the nation. When the deductibility of state income taxes on federal tax returns is taken into account, Illinois income tax is actually better for the wealthiest Illinoisans. The Earned Income Tax Credit (EITC) that has been put in place, is set to expire in 2002, which will take away a tax credit for the working poor and will add to the regressive nature of the income tax. Illinois could make the income tax more progressive by renewing the EITC, creating a refundable child care credit, and indexing personal exemptions.

Consumption Taxes (including Sales and Excise Taxes)

Illinois has one of the highest sales tax rates in the country because of its narrow base and poorly targeted exemptions. Its excise taxes, on things such as gasoline and cigarettes, are extremely regressive and hit the poorest Illinoisans the hardest. Consider when two taxpayers, one a low-income taxpayer and the other a high-income taxpayer:

• Purchase gasoline for their vehicles. Despite the vast differences in income levels, the two taxpayers, both with mid-size cars, will consume about the same amount of gasoline and pay about the same amount of tax. The high-income taxpayer who has $100,000 in yearly income, will probably not be affected much by $500 in excise taxes spent in a year, since that amounts to just 0.5% of his yearly income. The low-income taxpayer, with an annual income of $10,000, will be far worse off after the gasoline purchases, since that same $500 in excise taxes amounts to 5% of his income. The high-income person is left with a gross income of $99,500 to spend on other purchases, while the low-income person is left with just $9,500 to spend on basic family needs.

• Register their cars. Again, despite the difference in income levels or vehicle make, the two taxpayers will pay the same annual fee for their license plates--$78. Again, it is obvious that the high-income taxpayer will barely be affected by the fee, while the low-income taxpayer, with a weekly gross income of less than $200, most definitely will.

It is plain to see that these taxes and fees have a much harsher effect on lower-income taxpayers. Increasing these taxes and fees even a fraction of a percentage or an extra dollar or so may force these taxpayers to forego other purchases, like enough food, so that the family will have some reliable mode of transportation to get to work, or to the doctor's office, or to any other place that may not be accessible by public transportation.

Property Taxes

The share of revenue from property taxes has increased in Illinois during the last twenty years. Property taxes are regressive because home values are a much higher share of income for middle- and lower-income groups than for the wealthy. This is because it is not unusual for lower- and middle-income people to own homes that are worth considerably more than their annual income. In addition, the exemptions designed for relief are not reaching the intended groups. The state should reform the property tax by giving low-income homeowners and renters relief.