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Illinois Falling Short in Reducing Income Inequality

As another year’s tax season comes to a close, Illinois data continues to show that we must work harder to enact policies that reduce income inequality in our state.

 In Illinois, income inequality is high and has worsened over time.

Wage stagnation and tax policy are contributing to the increase in income inequality.

Nationwide over the last four decades, wages have grown for top earners, but not much at all for those at the bottom and in the middle.[3] Furthermore, in Illinois, top earners pay a lower share of taxes.

According to ITEP’s Tax Inequality Index, Illinois has the 5th most unfair state and local tax system in the country. This places an increased burden on the already strained budgets of low-income families. In 2015 in Illinois, families in the lowest income group paid the most state and local taxes as a share of their income (13.2%), roughly double the share that the highest income groups pay.[4]

Total state and local taxes paid as a share of income, 2015

ITEP Tax Graphic

 Source: Institute on Taxation and Economic Policy

Illinois needs new revenue to resolve the current budget stalemate and continue to provide important services to its residents. In looking at the state’s tax system, elected officials should consider the existing income inequality among its residents. Two ways Illinois can reduce the tax burden on working families are by increasing the state’s Earned Income Tax Credit (EITC) and establishing a state child tax credit.  These two measures will help put Illinois on the road towards a fairer tax system and improve the lives of thousands of Illinois residents.

Written by Anna Rowan


[1]Via the Center on Budget and Policy Priorities: EPI analysis of IRS data. Estelle Sommeiller, Mark Price, and Ellis Wazeter, “Income Inequality in the U.S. by state, metropolitan area, and county,” Economic Policy Institute, June 16, 2016

[2]KIDS COUNT Data Center

[3]How State Tax Policies Can Stop Increasing Inequality and Start Reducing It,” Center on Budget and Policy Priorities

[4]Who Pays?” A Distributional Analysis of the Tax Systems in All 50 States, 5th Edition,” Institute on Taxation and Economic Policy

Benefits of Doubling Illinois’ Earned Income Tax Credit

Voices for Illinois Children’s President Tasha Green Cruzat recently testified before the Illinois House Revenue and Finance Committee on the importance of increasing the state’s Earned Income Tax Credit (EITC).

The federal EITC is one of the most effective poverty fighting measures. A federal tax credit for low- and moderate-income working people, the EITC allows an individual to take a percentage of earned income as a credit against his or her tax liability. If the amount of the credit (based on income, marital status, and number of children) exceeds the individual’s tax liability, the federal government refunds the balance to the taxpayer. In 2015, the federal EITC kept 6.5 million people out of poverty. More than half of them were children.

federal EITCTwenty-six states and the District of Columbia have enacted state EITCs. In Illinois, a taxpayer receiving the federal EITC may take 10% of that amount on his or her state income tax return. The credit is also refundable in Illinois. In Tax Year 2014, more than 900,000 Illinois taxpayers took advantage of the state EITC for an average of $245. HB 2475 would increase the state’s EITC from 10% of the federal EITC to 20% over five years. Given projected increases in the federal EITC, the bill could result in an additional $265 annually (after five years) for taxpayers claiming the Illinois credit. That’s additional money used for basic necessities:  buying groceries, paying for car repairs, or helping to pay for child care.

State EITC

A study of state EITC’s done by the University of New Hampshire[1] found they resulted in lower use of public health insurance and greater use of private health insurance for children. It also showed that mothers reported improvements in their children’s health (particularly for children ages 11 to 14).

Other studies show children in families receiving the EITC score higher on educational tests and are likelier to graduate from high school[2].

The state EITC is a good investment for Illinois citizens as well as communities around the state. A review of economic studies by the U.S. Conference of Mayors shows that for every EITC dollar increase received by low and moderate income families, there’s an economic multiplier in the money generated in local economies of 1.5 to 2[3].

  • In a study of EITC benefits received by Michigan residents in 2006, every EITC dollar spent generated $1.67 in new economic output in the state[4].
  • A 2010 study of 58 California counties showed $3.6 billion in federal EITC dollars spent locally generated $5.08 billion of economic output, $1.24 billion in labor income and $355 million in tax revenue[5].
  • A 2004 study of the impact of the federal EITC in San Antonio area showed every EITC dollar received resulted in a local economic impact of $1.58[6].

The actual dollars returned to a community may depend on how many taxpayers claim the credit in each year, the amount of the credits, and the retail market in a community. However, the evidence is clear that investing in the EITC produces economic activity in the taxpayer’s community and tax dollars for both the state and local governments.

Overall, the EITC is a proven winner. It helps lift families out of poverty, improves the health and educational outcomes of family members, and positively impacts local communities.  Voices strongly encourages the state to double its EITC.

Written by Mitch Lifson


[1] Baughman, Reagan. 2012. The Effects of State EITC Expansion on Children’s Health. Carsey Institute. University of New Hampshire

[2] Caines, Roxy. 2017. 5 Ways the EITC Benefits Families, Center on Budget and Policy Priorities

[3] U.S. Conference of Mayors. Dollar Wi$e Best Practices. 2ND Edition. Earned Income Tax Credit.

[4] Anderson Economic Group, LLC. 2006. Economic Benefits of the Earned Income Tax Credit in Michigan.

[5] Avalos, A., and Alley, S. 2010. The economic impact of the Earned Income Tax Credit (EITC) in California. California Journal of Politics and Policy.

[6]Texas Perspectives Inc. 2004. Increased Participation in the Earned Income Tax Credit in San Antonio


 

Tax them and they will…stay

When Illinois temporarily increased its state personal income tax rate in 2011, an interesting thing happened. The number of households making more than $500,000 went up.

Yet, don’t we keep hearing that when faced with higher taxes wealthy people flee a state?

Yes, but it seems it doesn’t actually happen.

Illinois Department of Revenue data shows that in tax year 2010 the number of Illinois taxpayers with an adjusted gross income of more than $500,000 was 39,437. In tax year 2014 (after the income tax rate went up to 5 percent from 3 percent), the number of filers in that bracket stood at 54,827. That’s a 39 percent increase.

The reality, across the nation, is that when faced with higher taxes millionaires are more likely than non-millionaires to stay. It’s a conclusion borne out in a recent study that looked at almost 70 million tax records of households across the U.S. from 1999 to 2011.

Among the most interesting findings is that some millionaires leave their homes to go to Florida, which has no income tax, but movement to other non-income tax states such as Texas is far less frequent. This suggests there may be non-tax reasons for moving to Florida. (Perhaps, it’s the weather?)

There are several reasons why millionaires appear less likely to move than people with lower income. First, nearly all millionaires are married (90% versus 58% of the general population). In general, single people are twice as likely to move as married people. Second, business owners tend to move less than non-business owners because their sales and profits are often tied to a particular local or regional customer base, and there are almost six times as many business owners among millionaires as in the general population.

So it really wasn’t as surprising as people might have thought when the Minneapolis Star Tribune published a recent article with the headline, “There’s no evidence that ultra-rich are fleeing Minnesota.” The newspaper found that the number of income tax returns with income over $1 million grew by 15.3 percent after a 2013 income tax increase.

In a 2014 paper, Michael Mazerov at the Center on Budget and Policy Priorities noted that of seven other economic studies published on state taxes and migration since 2000, six concluded taxes do not drive interstate moves.

Moreover, tax cuts might well foster departures to other states. As Mazerov notes, if deep cuts result in “significant deterioration in education, public safety, parks, roads, and other critical services and infrastructure, these states will render themselves less — not more desirable places to live and raise a family.”

An important lesson that Illinois can take from the latest study and Minnesota’s experience is that Illinois has substantial room to raise tax rates without risking that more than a negligible number of high-income households will pack their bags. The top 1% of taxpayers in Illinois — those making $500,000 or more a year — pay only 4.6 percent of their income in state and local taxes; in Minnesota, the top 1 percent pays 7.5 percent in state and local taxes.

Effective tax rate

Furthermore, while Illinois has been cutting a range of critical services after the 25-percent income tax cut in 2015 and the related failure to enact a state budget, Minnesota has gone in the opposite direction, raising taxes to increase public investment in schools, transportation and other areas that help communities thrive.

Posted to Blog, Budget, Revenue, Taxes

Governor Can Give Lifeline to Services by Signing SB 2038

Nearly a month after receiving a bill providing more than $700 million for health and human services unfunded in the current fiscal year, Governor Rauner has yet to sign SB 2038. While not a permanent solution, the measure provides immediate relief for human service and healthcare providers that have managed to keep the doors open in spite of not receiving payment from the state on signed contracts.

The bill funds the services with money in dedicated state accounts established for specific purposes. The majority of dollars (nearly $462 million) is from the Commitment to Human Services Fund, which receives 1/30 of net personal income tax revenue. However, lacking authorization, this money simply sits idle. Governor Rauner can provide that authorization by signing SB 2038.

The General Assembly passed SB 2038 back in May without a single “no” vote.  It is not a permanent solution, but vital in the short term. Long term the state needs additional and sustainable revenue to keep providing these important services to Illinois residents.

Failure to Enact Fully-Funded Budget Results in Downgrades

In yet another blow to Illinois, Moody’s and S&P have both lowered their Illinois general obligation bond rating by one level – with Moody’s ranking just two steps above “junk bond” status.

Moody’s notes that the downgrade reflects a “continuing budget imbalance due to political gridlock that for more than one year has kept Illinois from addressing revenue lost due to income tax cuts that took effect in January 2015.”

Indeed, as the Voices’ Fiscal Policy Center pointed out just yesterday, inadequate resources after last year’s income tax cut is the main driver of Illinois’ current financial crisis. Just to provide state services at Fiscal Year 2015 levels, the FPC estimates Illinois needs $7.1 billion in new revenue.

Lawmakers and Governor Rauner need to come together to enact a budget and billions of dollars in new revenue. Failure to act will only increase the state’s debt, lead to more devastating cuts, and result in further downgrades.

Posted to Blog, Budget, Revenue, Taxes

Illinois Financial Crisis: Eight Things You Need to Know

The legislative session is over, and Illinois is about to enter its second year without a budget. Where does all of this leave the state?

Voices for Illinois Children’s Fiscal Policy Center offers eight takeaways to put matters in perspective and lead the way to a solution that gets Illinois back to making the public investments needed for the state to flourish.

  1. Illinois is Dismantling the Foundations of a Prosperous, Compassionate State. As the Fiscal Policy Center has chronicled, the lack of a fully-funded state budget is devastating for communities across Illinois. Our higher education system, an essential part of creating a strong workforce, is falling apart. Service providers are shutting down, and our safety net is collapsing. Survivors of sexual assault can’t get needed counseling; homeless youth are kept out of shelters; and the families of children with autism spectrum disorder are denied services that help their children thrive.
  1. Public Safety is Jeopardized. Violence in our communities has many causes and requires many solutions. Now, just when Illinois needs a coordinated, public health-centered approach to violence that plagues many communities, we are going in the opposite direction. Illinois has cut mental health and substance abuse treatment, after-school opportunities for youth, and programs like Redeploy that rehabilitate youth in their communities.
  1. Lack of Resources Drives This Crisis. Political posturing aside, the real problem is Illinois doesn’t have the money it takes to meet public needs. Illinois could be a thriving state, with opportunity for all, if it could make the public investments that have been impossible since the 2015 income tax cut. To return to the level of services of the 2015 fiscal year — the last year with a full budget — without adding additional debt, Illinois needs more than $7 billion in new revenue a year. Our state is way beyond the point where its financial problems can be solved by further cutting spending.
  1. Delay In Raising Revenue Means More Debt. Since the enormous income tax cuts of 2015, Illinois is racking up debt even with deep cuts in spending. This is because the state must still pay for a variety of things mandated under state and federal law. Every day lawmakers and Governor Rauner fail to agree on raising critically needed revenue, Illinois’ finances worsen. “Solutions” that fail to raise revenue aren’t really solutions at all. (Note: If public schools are simply not funded at all next school year, that would “improve” the budget picture on paper, but would have devastating effects.)
  1. Debt = Less Investment in Future. Increasing the state’s backlog of unpaid bills not only means unfair payment delays to people providing goods and services. It also restricts what Illinois can do in the future. Debt must be repaid using future revenue, taking resources away from schools, transportation, public safety, and other building blocks of broad prosperity.
  1. Without More Revenue, Increases to PreK-12 Education Funding Crowds Out Other Investments. Investments in preschool and K-12 education are some of the most important investments that our state can make. We absolutely need to be increasing these investments to create opportunities for our children and create a brighter future for Illinois. Without new revenue, however, the large increases to PreK-12 education that Democratic legislative leaders and Governor Rauner want mean that the state will further increase its debt (which will reduce future services and investments) and be forced to cut a range of services for children and families that support children’s healthy growth and development. We cannot continue to pit education against human services — children and families need both to succeed.
  1. Short-Term “Emergency” Budget is Not a Solution. At best, a six-month emergency budget to get elected officials past the November elections only slows the deterioration of our higher education system and our social safety net. Much of any emergency six-month budget would likely just fill existing holes and would not sustain critical services into next fiscal year. For example, under the outlines of the Governor’s emergency six-month budget plan, Illinois would provide no tuition-assistance (MAP grants) this fall for college students from families struggling to make ends meet.
  1. Governor Rauner Has Bill on His Desk that is Part of His Desired Six-Month Budget. The legislature passed by large bipartisan majorities Senate Bill 2038 to provide urgently needed funds to service providers owed $700 million by the state. The money sits in state accounts, unable to be spent until Governor Rauner signs the legislation he received nearly three weeks ago. More than 220 organizations, including Voices, have urged him to sign this bill.

To avoid further damage to our state, lawmakers and Governor Rauner must come together to enact a fully funded budget that raises billions of dollars in new revenue to support critical services and public investment in Illinois’ future. Anything else falls far short of strengthening our state.

Balance the Budget Without New Revenue? Nearly Impossible

Imagine, if you will, these three things happening:

  • Lawmakers and Governor Rauner fail to raise revenue for fiscal year 2017, which begins July 1.
  • They keep their promise not to cut (or even increase) support for PreK-12 education.
  • All other discretionary spending in the budget is completely eliminated.

Now here’s the question: If these three things happened would Illinois close the $7.1 billion hole it finds itself in today?

The answer: No way.

So this little exercise isn’t meant as a policy prescription. Rather, it’s an illustration that without revenue, it is virtually impossible to balance the budget without increasing debt or severely cutting education.

As the chart above shows, after last year’s 25-percent income tax cuts, state revenues are expected to be a little over $31.9 billion in the next fiscal year, according to the Commission on Government Forecasting and Accountability. Meanwhile, the Governor’s Office of Management and Budget (GOMB) estimates a general funds budget that funds services at the level of the fiscal year that ended June 30, 2015 and meets other state obligations would cost just under $39 billion.

That big gap is about $7.1 billion. Without revenue, that’s how much Illinois would have to cut to balance the next budget. Even then the state would make no progress paying down its huge backlog of unpaid bills, which is expected to reach nearly $10 billion by the end of next month, according to Illinois Comptroller Leslie Munger.

Cutting $7.1 billion from the budget wouldn’t be easy, even if it were desirable (which it isn’t).  For one thing, it couldn’t be done in an across-the-board manner. That’s because roughly $27 billion (70%) of the budget can broadly be categorized as “mandatory” spending. This includes: debt service, pension contributions, transfers made according to existing state law (largely to local governments and transit systems), Medicaid costs, and spending relating to consent decrees and court orders. It’s difficult (or impossible) to cut these areas.

The remaining $11.6 billion of the general funds budget can broadly be considered “discretionary” — it doesn’t have to be spent under law.  (For more details on how we calculated what is “discretionary,” click here.) This is not to say that these parts of the budget are unimportant. Far from it. This is spending on PreK-12 education, higher education, and a significant portion of human services, including areas such as homeless prevention, substance abuse and mental health treatment, and domestic violence.

Revenue Shortfall and Flat PreK-12 Budget Mean Impossible to Balance Budget

If lawmakers and Governor Rauner maintain (or even increase) funding for PreK-12 education, the total amount of remaining discretionary areas of the budget is less than the total revenue gap. In other words, even if the state eliminated entire sections of the state budget, it would still not balance the next state budget. Without billions of dollars in new revenue, it will be nearly impossible for the state to stop digging itself an ever-deeper financial hole. There is no getting around this.

Bipartisan Measure Provides Lifeline to Human Service Providers

The General Assembly passed by overwhelming bipartisan votes a $714 million bill (Senate Bill 2038) to fund human services for fiscal year 2016. The measure is essential to providing immediate relief to providers across the state struggling to stay open more than ten months into the fiscal year.

However, it does not remove the need for a full budget for both FY 2016 and FY 2017 (which begins July 1) that requires billions of dollars in new revenue to maintain critical services and investments in the state’s future. SB 2038 follows the General Assembly’s approval three weeks ago of $600 million in emergency funding to state universities, community colleges, and the Illinois Student Assistance Commission for Monetary Award Program grants.

Among the items in SB 2038 are $248 million for the Department of Human Services and $243 million for the Department on Aging (with the majority of funding for the Community Care Program). It also contains funding for other agencies including the Department of Public Health and the Illinois Housing Development Authority. A spreadsheet of the line items in SB 2038 can be found here or below.

Approximately 65% of the money in SB 2038 comes from the Advancement for Human Services Fund. This fund receives 1/30th of net income tax receipts from individuals, trusts and estates. The remaining funds include specialized funds for the designated purposes such as the Drug Treatment Fund, Department of Human Services Community Services Fund, and the Illinois Affordable Housing Trust Fund.

The funds do not cover any services or programs currently provided and funded under a court order. Along with a state order covering employee salaries, numerous court orders and consent decrees cover a variety of services (including Medicaid) for the fiscal year.

Download (PDF, 280KB)

Fair Tax Bill Introduced

On Friday, Representative Lou Lang introduced a fair tax rate structure (House Bill 689), which would provide over 99% of income taxpayers with a tax cut while raising $1.9 billion to prevent more harmful budget cuts. The fact sheet below shows the tax change for different families structures at various income levels.

Currently, Illinois is one of only a handful of states that has a constitutionally mandated flat income tax rate, which contributes to Illinois having one of the most unfair tax systems in the country — with low-income households paying a much larger share of their income in state and local taxes than high-income households.

For Rep. Lang’s structure to take effect, the General Assembly would first also need to put a constitutional amendment on November’s ballot, which would then need to be passed by voters. By joining the 34 other states that have a fair tax, Illinois can improve tax fairness and raise revenue to support critical services, all while cutting taxes for the vast majority of Illinois taxpayers.

Download (PDF, 435KB)

ICYMI: FPC’s Report on the Dismantling of Critical State Services

Two weeks ago, the Fiscal Policy Center released a report — “Lack of Budget Is Dismantling Critical State Services” — that captured the ongoing, and worsening, consequences of lawmakers and Governor Rauner’s failure to restore revenue needed to support essential services. This failure is resulting in widespread damage to Illinois, with children, seniors, and those with disabilities hardest hit.

The state is about to enter its fourth month without a budget, and while some services are being partially funded as a result of court orders or the availability of federal dollars, the lack of state appropriations has resulted in the deterioration — and in a growing number of cases, the elimination — of critical services for children, families, and communities.

Who is left standing at the end of this ongoing crisis is completely in the hands of the General Assembly and Governor Rauner. To prevent further damage, lawmakers and the governor must take responsibility for funding our state’s priorities by restoring the revenue we need to fully fund a year-long budget. Read the full report, authored by FPC Policy Analyst Lisa Christensen Gee, here. You can also watch our appearance on CLTV’s Politics Tonight below.