 With Republicans winning the presidential race and controlling both houses of
Congress, federal tax code changes may be on the way, and Illinois should
prepare by getting its state tax code in order. One of the first changes
Illinois should make is to repeal the state’s death tax. The death tax drives
out-migration of high-income Illinoisans, and it reduces economic growth in the
Land of Lincoln. This tax particularly harms owners of farms and manufacturing
firms.
One area of agreement between President-elect Donald Trump and the Republicans
who will control Congress is on the need to repeal the federal death tax. U.S.
House Speaker Paul Ryan’s tax reform plan includes a full repeal of the federal
estate tax, as does the plan put forward by Trump.
A repeal of the federal death tax would put pressure on Illinois, the District
of Columbia and the 16 other states that still have a version of the tax. Under
the current system, state death taxes can be deducted against federal death
taxes. Without the state deduction against federal taxes, the state-based death
tax will become an even greater driver of wealth flight from states that still
impose the tax.
Illinois’ death tax drives out the earners the state can least afford to lose
Illinois, like most states, is already dependent on higher-income earners for a
large portion of state income taxes. For example, Illinoisans with adjusted
gross income, or AGI, of $500,000-$1million make up only 0.7 percent of all
Illinois tax returns, but they pay 7 percent of all income taxes. And
Illinoisans with more than $1million in annual AGI make up only 0.5 percent of
all tax returns, but they pay 15 percent of all income taxes. These are the
income earners who are most likely affected by the state’s death tax, and
therefore most likely to leave Illinois for another state. Illinois’ one-time
bite of estate taxes is likely costing the state several years of income taxes
from some higher earners.
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 Many higher-income Illinoisans responded to the 2011 income-tax
hike by leaving the state. Any future income-tax hikes would likely
cause the same result. After the 2011 income-tax hikes, the average
income of people leaving Illinois grew to $77,000 per year in 2014,
compared with an average income of $57,000 for people moving into
the state. This $20,000 income differential is the worst of any
state.
Over the past two decades, Illinois has sustained a net loss of $50
billion in annual adjusted gross income due to migration losses to
other states. More than $14 billion of that loss came during the
four years of the income-tax hike. This amounts to a severe loss of
both economic activity and desperately needed tax revenue.
The largest recipients of wealth from Illinois are states without a
death tax and without an income tax – with Florida and Texas in the
lead.
Regardless of whether Illinois policymakers enact another
income-tax increase, they should repeal the state’s death tax.
High-income Illinoisans are already leaving the state. The death tax
costs Illinois economic activity and job creation as it drives
talented people out of the Land of Lincoln. With the federal estate
tax potentially on the chopping block, Illinois should make its own
state death tax a thing of the past.
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