Illinoisans are all too familiar with tax hikes. Chicago residents, for example,
have seen significant tax increases over just the last few years, including
2015’s sales- and property-tax hikes. And taxpayers across the state bore the
burden of Illinois’ 2011 increases in personal and corporate income-tax rates,
which partially sunsetted in January 2015. Tax hikes have become the default fix
to budget problems in Illinois, but rarely are the cost of tax hikes addressed.
Tax hikes hurt Illinoisans the most in lowering their wages and reducing their
standard of living, while also preventing economic growth from occurring in the
state.
Taxes aren’t simply a 1-to-1 trade-off where the government spends a dollar
instead of the private sector. Tax hikes involve what is called “deadweight
loss” whereby overall economic production is reduced as a result of the rising
tax burden. Recent tax hikes across Illinois come on top of an already heavy tax
burden and depress economic growth and job prospects in the Land of Lincoln.

A review of the academic literature on tax hikes shows policy leaders in
Illinois need to reconsider their reliance on tax hikes. The Tax Foundation
summarizes:
Nearly every empirical study of taxes and economic growth published in a peer
reviewed academic journal finds that tax increases harm economic growth.
Of 26 academic tax studies the Tax Foundation reviewed, all but three found a
negative effect of taxes on economic growth. Furthermore, of studies
distinguishing between types of taxes, corporate income taxes were the most
harmful for growth, followed by personal income taxes, then consumption (sales)
taxes and finally property taxes.
Foremost among these studies is one by Dr. Christina Romer, President Barack
Obama’s former chief economic adviser. Her conclusion:
Tax increases are highly contractionary… A tax increase of one percent of GDP
lowers real GDP (that would otherwise occur) by about 3 percent after about two
years.


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In addition, an International Monetary Fund study of 170 cases of
fiscal consolidation, which are episodes where budget deficits
needed to be closed by tax increases or spending reductions, found
that spending cuts are much less harmful to economic growth than are
tax increases. And a data-rich panel study looking at tax
differences between states, and evaluating taxation as a percent of
state personal income, found a robust negative effect of taxation on
economic growth. By that measure, Illinois was tied for the 5th
highest tax burden in the U.S. in fiscal year 2012.
Thus, academic literature overwhelmingly reveals an overall increase
in taxes is bad for growth. However, it also reveals the type of the
tax matters for growth.
A 2008 Organization of Economic Co-operation and Development, or
OCED, study of progressive taxation in 21 OECD countries found that:
Income taxes are generally associated with lower economic growth
than consumption taxes,
Corporate income taxes are especially anti-growth,
Progressivity of income taxes (rather than a flat tax like Illinois
has) causes an additional negative effect on growth.
Academic literature on taxation presents sobering analysis for
Illinois, considering all the recent taxes politicians have imposed
in the Land of Lincoln, including those such as the millionaire tax
and progressive income tax proposed and defeated in the General
Assembly in spring 2016, and others now in the planning stages,
Illinois has gone too far in the direction of tax hikes and done too
little to control spending. For a state sorely needing more job
opportunities and with a dragging economic growth, the prospect of
more taxes is going in the wrong direction.

Illinois needs to reform its spending, first and foremost. At both
the state and local levels, that means changing collective
bargaining with government unions so government officials can
present public employees with an employment package taxpayers can
actually afford rather than one that forces tax hikes thwarting
economic growth. Furthermore, Illinois should consider how it levies
taxes, and focus less on those taxes especially harmful to growth.
At the end of the day, a tax hike on Illinoisans guarantees lower
take-home pay for Illinois families and a lesser standard of living
for Illinois’ future.
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