Illinois Policymakers say: “The deal is, they take three months of grocery money in exchange for chips and a sandwich”

Hard work must have killed somebody

In a saga that falls into the category, “you just can’t make this stuff up” . . . Illinois policymakers recently enacted one of, if not the largest, tax hike in state history only to find themselves faced with threats of companies leaving the state. The response, give away special tax breaks of course!

Both Sears and the Chicago Mercantile Exchange have threatened to leave Illinois if something isn’t done about their tax burden. So now the legislature is debating SB 397 which would carve out special tax treatments for Sears and CME (pdf).

Included in this discussion is a proposal to increase the state’s Earned Income Tax Credit from to 15 percent from 5 percent of the federal EITC (though the specifics are still in flux). However, the EITC is a deeply flawed policy that hurts the working poor more than it helps. My latest study on the EITC proposal published by the good folks at the Illinois Policy Institute (pdf) finds:

Because taxpayers lose out on the earned income tax credit as their income increases, there is incentive for workers to keep their income under the “phase-out” level. Specifically, the only time during which the government rewards the worker for earning more money is when the worker’s income is moving from zero to $12,750. The federal earned income tax credit only encourages work effort in the phase-in income range where the effective marginal tax rate is negative 40 percent.

The taxpayer is, at best, indifferent during the plateau stage where the effective marginal tax rate is 0 percent. During the phase-out state – $41,000 for a single person and $46,000 for a married couple – the taxpayer is actually penalized with an effective marginal tax rate of 21 percent. Since the income range of the phase-out (21,800 to $46,000) is twice as large as the income range of the phase-in ($0 to $12,750), the federal earned income tax credit is spreading more work disincentive than incentives.

The state earned income tax credit, since it is an add-on to the federal earned income tax credit, only serves to exacerbate the work disincentives. The current state earned income tax credit is worth 5 percent of the federal earned income tax credit, which creates an effective marginal tax rate during the phase-out of 22 percent (versus 21 percent under the federal earned income tax credit alone). When the proposed state earned income tax credit worth 15 percent of the federal earned income tax credit takes effect in 2013, the effective marginal tax rate during the phase-out will increase to 24 percent. Expanding the state earned income tax credit will only serve to further discourage work.

Compounding the work disincentive related to the phase-out of the earned income tax credit are other federal, state and local taxes and other government welfare programs. These other factors increase the effective marginal tax rate faced by people in the earned income tax credit’s phase-out income range. Other taxes add to the tax burden on each additional dollar earned while, at the same time, the money received from other government welfare programs begins to phase out at approximately the same income range that the earned income tax credit begins to phase out.

In fact, a more comprehensive effective marginal tax rate estimate found that the effective marginal tax rate can reach as high as 65 percent! Faced with an effective marginal tax rate that high, many people will find themselves trapped by the earned income tax credit rather than helped by it. Expanding the state earned income tax credit will only dig the hole deeper for those people working desperately to better their economic situation.

Illinois would be better off using this money to lower the personal income tax rate or increase the exemption for all taxpayers, rather than expanding the deeply flawed earned income tax credit.

This was a fun study for me as there was a good deal of nostalgia since it was based on work from one of my first studies that I ever published for the Tax Foundation: “Growth of the Earned Income Tax Credit” (pdf) co-authored with Arthur P. Hall

Additionally, the EITC does nothing for Illinois’s middle class which has gotten clobbered by the recent tax hikes.  Watch the video below from Kristina Rasmussen of the Illinois Policy Institute which explains how “the deal is, they take three months of grocery money in exchange for chips and a sandwich.”  It’s no wonder why taxpayers are fleeing Illinois.

Amazon Tax Update: Fatwallet Flees Illinois

Illinois also recently enacted the Amazon tax . . . here is a mini-documentary of Fatwallet.com‘s five mile move from Illinois to Wisconsin.

Hat tip to Illinois Policy Institute:

As news that Amazon.com is seeking to challenge the new California law attacking online affiliates via a ballot initiative, it’s worth remembering that Illinois passed its own misguided online affiliate tax hike not too long ago.

This documentary tells the story of how that bad Illinois policy spurred FatWallet.com to move just a few miles north into Wisconsin. Now Illinois gets none of their money — no property taxes, no income taxes, no fees, nothing. It is a must watch.

Bad policy caused this bad outcome for Illinois. The good news is that good policy — repealing the tax — can help bring companies home and keep others from leaving.

We are 21

The good folks at the Illinois Policy Institute have taken some of my research and created a new website call “We are 21.” It’s based on the fact that in Illinois it takes 21 private sector workers to fund 1 state government worker.  Here is a cool video they have made:

The great thing I like about doing this report is that it is based on tax data from the liberal Institute on Taxation and Economic Policy.  What are they going to do, say it’s a lie 🙂

Taxes Matter V: Illinois Taxpayers Flee State

Today the Illinois Policy Institute released my study on the migration of people and income out of Illinois: “Leaving Illinois: An Exodus of People and Money.” (pdf)  Here is the Executive Summary:

Migration between the U.S. states is the ultimate expression of “voting with your feet.” People move for many reasons, but, when examined en masse, it’s clear that public policy significantly influences where people choose to live. This study undertakes a thorough examination of Illinois’s migration patterns to better understand progress on important public policy issues. Key findings include:

  • Illinois lost a net of 1,227,347 residents to other states between 1991 and 2009, or slightly more than one resident (1.22) every 10 minutes.
  • The top states that people from Illinois move to are Florida, Indiana, Wisconsin, Arizona and Texas.
  • Illinois lost 86,021 taxpayers between 1995-2007 to its border states: Wisconsin, Indiana, Iowa, Missouri and Kentucky. This represents $4.1 billion in lost Adjusted Gross Income (AGI) and $26.8 billion in cumulative AGI loss.
  • Illinois lost people and taxpayers to 40 states and the District of Columbia, and Illinois lost net income to 42 states and the District of Columbia.
  • The total net income leaving the state averaged over $1.8 billion between 1995 and 2007 with a total loss of $23.5 billion. Had this income stayed in Illinois, state and local governments would have collected an estimated $2.4 billion in additional tax revenue.
  • When a resident moves out of Illinois, the state doesn’t just lose income and taxes for that one year; rather, the state loses any income and taxes that resident would have generated for all future years. Compounding these figures over the 13 years assessed in this study – without adjusting for inflation – the state has lost $163.6 billion in net income and $16.9 billion in state and local tax revenue due to out-migration.
  • People move from Illinois to states with lower taxes (especially estate taxes), lower union membership, lower population density, lower housing costs and warmer weather.
  • The most significant driver of out-migration, on a percentage basis, is the estate tax. This is especially important considering that the number one destination state for former Illinois residents is Florida, a state with no estate tax (or individual income tax).

Conclusion: Without action, out-migration will continue to reduce the ability of both the private and public sectors to ensure Illinois’s economy becomes strong and vibrant.

In breaking news, the Wall Street Journal reports that Illinois Legislature just passed an enormous tax hike raising the individual income tax rate from 3 percent to 5 percent and the corporate income tax rate from 4.8 percent o 7 percent.  If you think the exodus from Illinois was bad in the past, this tax hike is going to send the exodus into over-drive . . . especially the out-migration of income which is more mobile than people.

Update: The Tax Foundation weighs in as well on the Illinois tax hike . . . in their State Business Tax Climate Index Illinois falls from 23rd to 36th, that’s quite a fall.

The State of America’s Private Sector XVI: Illinois Edition

Last week a massive, massive tax increase was announced in Illinois–did I mention that is was massive?  The details of the Illinois tax increase, according to the Chicago Tribune, are as follows:

Under the proposal, the state’s 3 percent personal income-tax rate would rise to 5.25 percent for four years, then fall to 3.75 percent. All told, that’s a 75 percent increase.

The personal income-tax hike is expected to net the state roughly $6.2 billion, and a corresponding corporate income tax increase could raise an additional $1 billion, Cullerton said. The rate businesses pay would temporarily jump from 4.8 percent to 8.4 percent.

The cigarette tax increase, which is expected to raise $377 million, would go into what was described as a “lock box” to increase education funding. Lawmakers said they hoped to double that amount using other funds to provide more than $700 million in new school funding this spring.

To gain votes for the package, the plan also would provide $325 in property tax credits to homeowners this year and a direct check to taxpayers in subsequent years.

As a measure of how desperate state government’s finances are, Cullerton said the state would use the income-tax hike to borrow $12.2 billion. Of that, $8.5 billion would pay overdue bills and $3.7 billion would cover a government worker pension payment lawmakers skipped when putting together the current budget, he said.

Using the relationship that shows the public sector crowds-out the private sector, I recently showed that two other modest tax increase proposals (modest is relative) would impose a significant cost on Illinois.  I’ve estimated that under this proposal Illinois’s economy could suffer a $17.3 billion reduction in personal income over the next three to five years as a result of this tax hike, translating into $3,625 less in personal income per household or the loss of 288,473 private sector jobs. Adding insult to injury, the average Illinois household also faces an increase in their state tax burden of $1,598.

The Tax Foundation also finds that this is a very bad deal for Illinois’s business tax climate.  They have also found that Illinois would also sport the “highest state corporate income tax in the United States and the highest combined national-local corporate income tax in the industrialized world.”  Yikes!

There will also be higher crime due to increased cigarette smuggling stemming from the higher cigarette tax.

If you live in Illinois and are wondering how much this tax hike will cost you . . . check out this tax calculator from the good folks at the Illinois Policy Institute.