Illinois Legislature Proposes Whopping 66 Percent State Income Tax Increase

Faced with a grave budget crisis due to falling incomes and tax revenue, the Illinois General Assembly today narrowly approved a 66 percent increase in state income taxes. This temporary increase in state income taxes raises the state income tax from 3 percent to 5 percent of taxable income for four years, according to Deanna Bellandi of the AP, and then falls to 4 percent.

Accusations of runaway spending having led to this situation, and that it will become permanent, abound. Illinois Gov. Pat Quinn reportedly supports the bill as a means of bridging the state's deficit, but has yet to sign it. Kyle Petersen of Reuters reports that state business leaders are incensed by the measure, criticizing it as harmful to the state's economic recovery and saying that it will lead to more business closures.

Due to the recession, a majority of state governments are feeling the pressures of a need for increased spending at a time when tax revenues are falling. Infrastructure is crumbling; more people are unemployed or needing financial assistance due to significantly lower incomes. All the while, state and local coffers are feeling the pinch of decreased tax revenues. Here in Nashville, Tennessee, where there is no state income tax, there has been talk of instituting one to shore up state finances.

The tax burden in Tennessee is quite low when compared to other states. In 2008, Tennessee ranked 44^th out of the 50 states in the amount of state taxes paid by its residents, according to a study by the Tax Foundation. There are no state income taxes on most personal income, property taxes are reasonably low, and vehicle taxes are very low. The state makes up for it with a higher sales tax, but for savers, Tennessee is quite nice.

Initiating a state income tax of 5 percent, as proposed by Illinois, would have a crippling effect on citizens of Tennessee. Already paying a 7 percent state sales tax plus city sales tax, Tennesseans would face similar hardships to the folks in Illinois, who pay 6.25 percent, plus city sales taxes. For my own financial affairs, this would mean a decrease of a few hundred a month from my household income. This is money that, while it would go to the state treasury to help balance the budget, would not circulate in the local economy.

A study by the group Civic Economics, in the Andersonville area of Chicago, found that spending $100 in a chain firm such as Wal Mart or Home Depot translated to $43 remaining in the local economy; if that $100 was spent at a local, independently owned store, $68 remained in the local economy. This means that the money I spend at a local or chain store continues to circulate within the community. It is paid out to employees as wages, to the store owners, and to maintenance and service people who repair or clean the store. These people, in turn, spend their income locally, some of which remains to circulate in the local economy. If the state implements a significant increase in taxes, this money disappears from the local economy. Spending is reduced. The result will almost certainly be a loss of jobs.

States need to balance their budgets, no doubt. However, in the face of such a massive, abrupt increase in taxes, citizens should not sit idly by on the sidelines. In Illinois, as the bill awaits Gov. Quinn's signature, call your governor's office immediately. Make the hardships your family will face known. If you are a business owner, state the facts. What impact will pulling X dollars from your company have on your business? How many jobs will you be forced to cut?

In Tennessee's case, we still have time. We need to continue to petition our representatives and senators, reminding them of how good we have it here. If more revenue is needed, encourage them to look to targeted tax increases and the elimination of wasteful spending, rather than blanket tax increases that affect everyone. Illinois, you have my sympathy.

Sources:

Bellandi, Deanna. (2011). Illinois Faces 66% Tax Boost Amid Budget Crisis.
Peterson, Kyle. (2011). Illinois Business Leaders Bristle at Planned Tax Hike.
Tax Foundation. (2008). State and Local Tax Burdens.
Civic Economics. (2004). The Andersonville Study of Retail Economics.