As neighboring states cut their income tax rates, Illinois stays put

[March 21, 2023]  By Andrew Hensel | The Center Square

(The Center Square) – The six states bordering Illinois have all decided to cut their income tax rates over the past two years. One economic analyst says Illinois must follow suit or risk losing more residents.

Iowa, Missouri, Kentucky, Wisconsin, Indiana and Michigan all have made the decision to cut their individual income tax rates over the past two years. Iowa's individual income tax rate dropped from 8.53% to 6.0% in 2023, and Missouri has decreased its from 5.3% to 4.95% this year. Kentucky, Michigan and Indiana also have made smaller changes of a couple of percentage points, according to data compiled by Wirepoints.

Illinois has a flat income rate of 4.95%. Individual income tax collections per capita are $1,726, the 14th highest in the nation.

Ted Dabrowski of Wirepoints explained why so many states around the nation have decided to cut their income tax rates.

"One of the things we have found is that 22 states around the country have permanently cut their income taxes," Dabrowski told The Center Square. "The reason why is because they are all booming in revenue after all of the COVID aid."

Illinois received $8 billion in federal COVID-19 relief funds but has not made any budget cuts.

Gov. J.B. Pritzker said Friday he has been in discussion with lawmakers on both sides of the aisle to figure out a way to provide tax relief to Illinoisans.

"I have talked to Republicans and Democrats about things that we can do," Pritzker said. "I think again, we want to be conservative in thinking about it and on the other hand, expansive in hoping that we have even more [revenue] over the next couple of years where we can make some significant changes."

Dabrowski said if changes are not implemented, Illinois will fall behind other states in key areas.

"In the digital world we live in, everybody knows everything now, and you are starting to see states compete on taxes, states compete on jobs, states compete on home values, and we are losing in Illinois," Dabrowski said.

Illinois has had eight consecutive years of population decline, which Dabrowski attributes to the state's high taxes, and other states lowering theirs.

"All these other states become very attractive for Illinoisans," Dabrowski said. "It's why those states are booming in growth, booming in home values, booming in job creation, and Illinois is shrinking."

In January, state Sen. Robert Martwick, D-Chicago, suggested a possible switch to a progressive income tax with higher rates for higher earners.

"We are on a path to a place where the state will once again have to cut funding for education, essential services, public transportation, we will stop investing in our roads, and our bridges will crumble," Martwick told The Center Square earlier this year. "Because we are not paying attention to that."

Martwick quickly received push back from across the aisle and urged Republicans to devise a plan if they did not want to switch to a progressive income tax.

"This is an idea. Is it the best idea? I do not know, but it is an idea. It's a solution for those problems," Martwick said. "What I would say is that this is my solution. What is yours?"

Pritzker has said he would not be looking to switch to a progressive income tax rate, but Dabrowski said Pritzker should go one step further and shut down any possible legislation that aims to make that change.

"All these other states are cutting taxes, and yet you've got Sen. Martwick promoting a progressive income tax," Dabrowski said. "Governor Pritzker said he's not interested in that, but I think if he really wanted to help Illinoisans, you would want him to tell Martwick to put that plan away and back off that progressive tax."

Illinois voters rejected a progressive income tax proposal in 2020, which would have brought a tiered income tax structure with increased taxes on higher-income earners.

Andrew Hensel reports on issues in Chicago and Statewide. He has been with The Center Square News since April of 2021 and was previously with The Joliet Slammers.