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 Gov. J.B. Pritzker unveiled his long-awaited progressive income
tax plan on March 7. While the governor claims his proposed changes to the
personal and corporate income taxes will bring in another $3.4 billion in
revenue, static and dynamic scoring of his plan reveal it will result in far
less. Moreover, in order to raise his promised revenue, lawmakers will have to
hike tax rates on all Illinoisans.
Not only will the tax hike fail to add the hoped-for revenue to
the state’s coffers, but raising income tax rates using a progressive income tax
will also harm Illinois’ economy.
Investments in human and physical capital have large positive effects on
economic growth, but tax increases deter investment. Progressive income taxes
deter investment even more than equivalent flat taxes for two reasons: 1) If
individuals are taxed at a lower rate while less skilled and at a higher rate
when they become more skilled, the incentive to becoming skilled will be
diminished; and 2) Top earners who have a higher propensity to invest are also
more responsive to tax policy changes. The decline in new investments negatively
affects labor demand. That means fewer new jobs for everyone and a decline in
economic growth.
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This is consistent with the bulk of empirical
evidence and with what happened in the last state to adopt a
progressive income tax: Connecticut, in 1996. While sold as
“middle-class tax relief” – just like Pritzker’s proposal – the
typical Connecticut household has been hit with repeated tax hikes.
The typical Connecticut household has seen a 13 percent hike in
their income tax rates since 1999, when the progressive income tax
was fully phased in. And property taxes as a share of income are up
more than 35 percent.
Using empirical methodology known as the synthetic
control method, Illinois Policy Institute research has revealed that
the tax policy change cost Connecticut’s economy more than $10
billion in the decade that followed the state’s progressive tax
experiment.
At the same time, the tax did nothing to fix the state’s finances.
Connecticut’s progressive income tax has failed to alleviate the
state’s dire fiscal condition. The state has run budget deficits in
12 of the past 15 years and has more debt per capita than nearly any
other state. The state is also plagued by persistent population
decline driven by domestic outmigration in recent years.
Illinois cannot afford to follow Connecticut down this economically
dangerous path. The Prairie State should turn away from tax hikes
and focus instead on reining in and reprioritizing state spending.
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