Saturday, January 29, 2011

Illinois Income Tax Increase Hits Middle and Low Income Taxpayers Hardest

Democrats are always clamoring to soak the rich with higher taxes, who they insist aren't paying their share, but in Illinois, where Democrats control state government, their 66% increase in the state income tax from 3% to 5% is hitting middle and lower income workers the hardest. The Springfield Journal-Register explains:

All Illinoisans are going to feel the impact of the state’s income tax increase, but experts on both sides of the issue say low- and middle-income families will be hit the hardest.

“It’s especially going to hurt lower-income folks — those who are just starting out in careers or are struggling for whatever reason, who have incomes in the $20,000-$40,000 range,” said John Tillman, chief executive of the conservative think tank Illinois Policy Institute.

“Here’s what people miss when they discuss this tax increase — the incremental cost of this tax increase, comes off of the last dollar saved or spent by anyone.”
The Journal-Register highlights the impact of the tax increase on one family who recently moved to Illinois from Florida but is now planning to move back to Florida because of their tax burden:

Alfonso Lee, 42, who works in document management at the Willard Ice Building – ironically, the headquarters of the Illinois Department of Revenue -- and said the tax increase was “crazy.” He moved to Springfield from Florida with his two children a year and a half ago, when his wife got a job at Memorial Medical Center.

“It is going to make it harder to take care of our family,” Lee said. “We’ve got two cars, but we’re both riding the bus. Gas is high, taxes are high, we’re riding the bus to make ends meet.”

Lee and his wife make a total less than $50,000 a year, and the tax increase has hit his wife’s paycheck especially hard, he said. The family plans to move back to Florida.

“If they’re going to raise taxes, tax the alcohol and the cigarettes — something that hurts people,” Lee said. “If you’re going to raise taxes, raise it on that. That will help people, instead of hurting them.”
What makes the tax hike even more burdensome on low- and middle- income families is that average personal income has fallen for the bottom 60 percent of Illinois wage earners over the past 40 years, said Ralph Martire, executive director of the Center for Tax and Budget Accountability, which has long advocated for a tax increase, but with progressive reforms to the tax structure.

“Imposing a tax burden on them is difficult with the decline in personal income,” Martire said. “It contributes to the growing income inequality between them and the top 30 percent.”

Between 1979 and 2008, the median wage in Illinois fell 3.2 percent, from $34,757 to $33,654 in 2009 dollars, according to Bureau of Labor Statistics data published by the center. The median wage fell an additional $333 in 2009, to $33,321.

“It’s very clear from a tax-policy standpoint that Illinois needs more tax equity,” Martire said.

The really disturbing statistic is how wages have fallen at the same time the cost-of-living staples have increased substantially, even if the government's way of calculating inflation tells you otherwise. The argument in the Journal-Register's article turns to whether Illinois should change its income tax from being a flat tax as opposed to a progressive tax.

Forty-one states tax individual income. Of those, seven, including Illinois, have flat rates -- everyone is taxed at the same rate. The remaining 34 states have progressive tax rates -- taxpayers are grouped into brackets depending on how much they earn. High earners pay higher income tax rates.

“Because it taxes based on people’s ability to pay, the progressive income tax … could be said to be fairer,” Bouman said.
When I used to work for the Illinois legislature, I staffed the House Revenue Committee. One of the things we always prided ourselves in was our flat income tax because we were able to maintain a very low tax rate that was very simple and easy to administer. At that time, the rate was 2% compared to the 5% rate being collected today. Indiana has a flat 3.4% tax rate but there are local income taxes imposed on top of the state tax in a number of communities, including Indianapolis, and Indiana's exemption amount is even lower than Illinois'. Indianpolis' local income tax adds 1.65% to the rate, which means we are actually taxed higher than Illinois' tax rate even with their 66% income tax increase. In that sense, Gov. Daniels and Mayor Ballard are way off base if they think taxpayers and businesses are better off in Indiana if you are comparing the state's income tax rates. The average income tax rate in Indiana when adding in local income taxes is 4.83%, only slightly lower than Illinois' rate. To compare to the federal income tax, the story notes nearly half of all American taxpayers pay no federal income tax because they don't earn enough, or their deductions reduce their tax liability to zero. By comparison, only about 10% of taxpayers in Illinois don't pay state income taxes. The story notes Illinois does not tax retirement income.


Downtown Indy said...

When will politicians learn that taxes aren't a solution to a problem, they ARE the problem?

dcrutch said...

I'm not sure if wipe-out all the deductions & loopholes and make everybody (I mean everybody) pay something isn't the answer. Now, whether that means after the "clean slate" a graduated income tax, flat tax, or fair tax- I don't know.

Part of our trouble with government is we don't trust it. Half of America not paying ANY federal income tax and off-shore corporate tax shelters do no instill trust. They're also two of the biggest cans of gasoline in our inferno of class warfare.

artfuggins said...

...and your solution is...?

dcrutch said...

If your question is directed at me: reduce spending across-the-board until mature deliberation, flush-out the tax system and make everybody pay based on graduated income that accomodates lessened revenue need, repeal health "reform" while simplifying a' la taxes to better reveal real costs & solutions, get out of education federally, dissolve much foreign policy spending while securing America domestically & deliberatively assimilating illegal immigrants, and strip-out much regulation that hampers free enterprise instead of running government printing presses incessantly.