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New Issue Brief—Improving Tax Fairness Through Income Tax Reform

Did you know that Illinois has one of the most unfair tax systems in the nation? Our new issue brief, “Improving Tax Fairness Through Income Tax Reform,” delves into the issue of Illinois’ upside-down tax system and explains how a reformed income tax can help fix it.

By an “upside-down” tax system, I mean this: when adding up the effect of all state and local taxes—income, property, sales and excise—Illinois asks middle- and low-income households to pay a much larger percentage of their incomes than high-income households.

A household making $10,000 a year, for example, pays 14 cents of every dollar in state and local taxes; a household making $50,000 pays 11 cents for every dollar; and a household making $1.5 million pays only 5 cents per dollar. This means that the household with $10,000 pays almost three times as much as a share of their income in state and local taxes as the household making $1.5 million, and the household making $50,000 pays more than twice as much of their income as the household making $1.5 million.

The result is an upside-down tax system—those who can afford it the least are contributing a bigger chunk of their income to pay for the public resources we all value—including quality education, sound roads and bridges, and safe communities.

It doesn’t have to be this way, but it is because Illinois relies on the kinds of taxes that eat up so much of what middle- and low-income households earn—including property, sales, and excise taxes—while failing to offset the upside-down effects of these taxes through a highly progressive income tax. Progressive income taxes reflect ability to pay, requiring those with higher incomes to pay a higher share of their income and those with lower incomes to pay a lower share.

Illinois can improve the fairness of its overall tax system by improving its income tax. The issue brief outlines two tax measures that lawmakers are currently considering that would vastly improve tax fairness in Illinois: 1) replacing the current flat rate income tax structure with a multi-tiered structure that applies lower rates to lower levels of income and higher rates to higher levels of income; and 2) expanding the state Earned Income Tax Credit (EITC). 

It is important that our state and local governments are able to raise sufficient money to pay for important public resources including education, roads and bridges, and public safety. However, Illinois can and should raise this money in a manner that takes less of a toll on middle- and low-income households. By putting in place a multi-tiered income tax based on ability to pay and expanding the state’s Earned Income Tax Credit, Illinois can make significant steps towards improved tax fairness.

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