Illinois Study Press Release

	Tuesday, February 19, 2002 CONTACT: In Illinois: 301/379-4669 In Washington, DC: 202/626-3780, ext. 21
Institute on Taxation & Economic Policy 1311 L Street, NW Washington, DC

Much Talk, Little Action:
New Study Finds Little Change in Regressive Illinois Tax System

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The Illinois tax system is out of balance, and recent tax changes have done little to correct the situation, according to a study released today by the Washington, DC-based Institute on Taxation and Economic Policy (ITEP).

“Illinois relies heavily on regressive local property taxes to fund public services, ” said Matt Gardner, an author of the study. “The series of small-scale tax changes enacted in recent years have done little to change this imbalance.”

The study, Balancing Act: Tax Reform Options for Illinois, documents the imbalance between property taxes in Illinois—which are well above the national average—and income taxes, which are well below the national average. The ITEP study also finds two other sources of “imbalance” in the tax system:

the state’s use of regressive sales and excise taxes means that low-income Illinoisans face the highest tax burden, as a percentage of their income, of any income group—while the low income tax burden means that the wealthiest Illinoisans pay the least as a percentage of income.
loopholes in the income tax, sales tax and property tax base mean that some taxpayers receive special tax breaks, shifting the burden to all other taxpayers.

ITEP’s study presents a menu of thirty options for resolving these three sources of imbalance in the Illinois tax system, including options that raise revenues, options that reduce revenues, and options that leave state revenues unchanged.

Illinois is a Low-Tax State—and a High-Property-Tax State

The overall Illinois tax burden is just 35th highest nationally, almost five percent below the national average. Yet the Illinois property tax burden is more than twenty percent above the national average—while the income tax burden is more than twenty percent below the national average. And at a time when many states have moved to reduce their reliance on regressive local property taxes through a “tax shift” toward income taxes, Illinois has done the opposite: property taxes are a greater share of Illinois taxes today than twenty years ago.

“Despite the unpopularity of property taxes among taxpayers, and despite a series of blue-ribbon commissions recommending a reduction in property taxes, lawmakers have continued to make property taxes the workhorse of the Illinois tax structure,” commented Gardner.

Middle- and Low-Income Illinoisans Pay the Most

The ITEP study also found that the Illinois tax system is regressive—that is, middle- and low-income families pay a higher share of their income in state and local taxes than do the well-off. The middle 20 percent of Illinois families and individuals—with average incomes of $36,400—pay 10.0 percent of their income in Illinois state and local taxes. The poorest 20 percent of taxpayers—with income below $15,000—pay 13.0 percent of their income in Illinois taxes. But the wealthiest 1 percent—with average incomes of $1.2 million—pay only 6.0 percent of their income in Illinois taxes.

“No one would intentionally design a tax structure that applies the highest rates to low-income taxpayers, and the lowest rates to the wealthy. Yet that’s effectively how the Illinois tax system works,” said Gardner.

Balancing Act identifies the key features contributing to the tax system’s overall regressivity: highly regressive sales and excise taxes, high property taxes, and an insufficiently progressive personal income tax.

The state income tax, traditionally used by states to partially offset the impact of sales and property taxes on low-income taxpayers, falls heavily on low-income Illinoisans.

“Illinois has done relatively little to shelter low-income taxpayers from the income tax. At the same time, lawmakers have been more than willing to grant wealthier taxpayers loopholes that reduce their effective tax rate below the rate paid by middle-class taxpayers,” said Gardner.

Narrow Tax Bases Reduce the Yield—and Equity—of Illinois Taxes

Each of the state’s major taxes—income, sales and property—include targeted tax breaks which provide little or no benefit to large groups of Illinoisans while providing smaller groups of Illinoisans with substantial tax reductions. For example:

The state sales tax applies to sales of goods, but not services. For example, a low-income taxpayer purchasing a roach trap is taxed, but a wealthier taxpayer hiring an exterminator is exempt.
The state income tax allows a credit for educational expenses which is unavailable to many low-income families with children, and exempts all pension and Social Security benefits received by elderly taxpayers—while fully taxing all wages earned by seniors.
Illinois provides several types of property tax relief to homeowners—but the biggest of them, the 5 percent property tax credit, is less useful for low-income homeowners because it is applied as a credit against personal income taxes. Taxpayers who are property-rich but income-poor may not receive this credit at all. And taxpayers who rent, rather than own, their home, are completely ineligible for the property tax credit. Finally, the low-income circuit breaker provides tax relief for substantially less of the population—and provides less tax relief to those that receive it—than when it was first enacted.
The corporate income tax “single sales factor” benefits large manufacturing firms while increasing tax liability for smaller firms that sell their goods in Illinois.

Each of these tax breaks undermine the perceived fairness of the Illinois tax system by treating similarly situated taxpayers in very different ways.

Study Includes Options for Illinois Tax Reform

Balancing Act also provides a detailed description of the distributional and revenue effects of 30 options for Illinois tax reform. These include revenue-raising proposals, revenue-neutral “tax swap” options, and revenue-reducing options.

The Institute on Taxation & Economic Policy has engaged in research on tax issues since 1980, with a focus on the distributional consequences of both current law and proposed changes. ITEP's research is relied on by the public and policymakers, and ITEP is frequently consulted by government estimators in performing their official analyses.