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

Part II: Illinois Tax Questions

Illinois is a low-tax state right?

While Illinois is often referred to as a "low-tax" state, that is not true for everyone. The regressive structure of the system means that the tax burden on low-income Illinoisans is actually among the highest in the nation. The income tax is comparatively low, but the property tax is very high. The property tax burden has grown as a share of Illinois taxes at a time when states have been increasing their reliance on income taxes. 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.

• Illinoisans who make less than $15,000 per year pay 13 percent of its income in state taxes.
• Middle class families pay 10 percent of their income in taxes.
• Wealthy Illinoisans, with an average income of $1.2 million pay only 6 percent of their income in state taxes.

What are the underlying structural flaws in the tax system?

• The state income tax is limited by its low, flat rate and its narrow base.
• Major income tax reforms are hindered by the clause in the constitution that requires a flat rate income tax. This is that a graduated income tax would require constitutional changes.
• The complete exclusion of retirement income (such as pensions) and an expensive credit for educational expenses limits the ability of the state to provide more meaningful low-income tax relief.
• Illinois does not take advantage of the interaction between federal and state taxes. Progressive revenue-raising measures focusing on the income tax will be partially subsidized by federal tax dollars, while the burden of regressive tax hikes on the sales taxes will be placed entirely on the shoulders of Illinois consumers.
• The sales tax is limited by a narrow base and is extremely regressive. The property taxes are high compared to most states – and are getting higher.
• The corporate income tax is riddled with loopholes. The recent introduction of the single sales factor will compound the drain on the tax base.

But haven't the Governor and legislature implemented tax relief measures in recent years?

The tax relief measures enacted in the past few years have been small in scope and only slightly progressive – and have not been sufficient to outweigh regressive inflationary income tax hikes. The personal exemption has lost much of its value value since it was enacted in 1969. Even the recent doubling of the exemption left the current value at less than half its original value. The existing Earned Income Tax Credit is the smallest in that nation. Also, these stopgap tax relief measures have done nothing to resolve the underlying structural flaws in the tax system.

What do you mean low- and moderate-income families pay more? How is that even possible when there is a flat rate?

It's true: middle- and low-income families do pay a higher share of their income in state and local taxes than do the well-off. The lowest 20 percent of Illinois families and individuals – with income below $15,000 – pay 13 percent of their income in state and local taxes. Meanwhile, the wealthiest one percent – with average incomes of $1.2 million – pay only 6 percent of their income in Illinois taxes.

The flat rate only applies to the income tax, with everyone subject to the same tax rate. And even with a flat rate, low-and moderate-income families are affected substantially more than wealthier taxpayers because they start and are left with less money to pay for other expenses. Furthermore, the income tax is only one of many state taxes paid. Highly regressive sales and excise taxes, and high property taxes amount to the overall regressivity of Illinois taxes, where low-and moderate-income taxpayers pay more as a percentage of their income than wealthier taxpayers.

Because state corporate taxes piggyback on federal taxes, loopholes in the federal corporate income tax are passed straight through to Illinois. Many profitable corporations have paid little or no federal income taxes in recent years, which means that their tax burden is shifted to other taxpayers.

Who benefits from tax breaks in Illinois?

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

How does Illinois compare to the nation and our neighboring states?

Some taxes are comparatively low while others are comparatively high. While the Illinois personal income tax and consumption tax burden is low compared to neighboring states, the property tax burden is high. The IL state and local income tax burden was more than twenty percent below the national average in 1999 – and the property tax burden was about twenty percent above the national average.

Why is now the time for reform?

For most of the last decade, Illinois has enjoyed an adequate stream of state and local revenues. Yet these short-term surpluses have masked a more serious long-term deificit: Illinois relies heavily on slow-growth taxes, which are insufficient in the long run to fund future needs.

Twice in recent years, lawmakers have resorted to tax hikes as a means of funding particular initiatives: 1997 legislation devoted new excise and gambling tax revenues to education, and 1998 legislation funneled a variety of excise tax hikes and vehicle registration fees toward an ambitious transportation infrastructure program. In each case, lawmakers have enacted a short-term fix that actually worsens the long-term problem of adequacy facing facing the state.

The fiscal shortfalls facing the state in 2002 are more serious, and seem likely to recur unless the state enacts tax reforms that solve both the short-term deficit and the long-term problem of inadequate revenue growth.