Illinois Policy 7/22/2016
Politicians’ quick answer to the state’s problems is consistently to raise taxes, but evidence shows tax hikes are a negative for families struggling in a state already lacking opportunity.
Illinoisans are all too familiar with tax hikes. Chicago residents, for example, have seen significant tax increases over just the last few years, including 2015’s sales- and property-tax hikes. And taxpayers across the state bore the burden of Illinois’ 2011 increases in personal and corporate income-tax rates, which partially sunsetted in January 2015. Tax hikes have become the default fix to budget problems in Illinois, but rarely are the cost of tax hikes addressed. Tax hikes hurt Illinoisans the most in lowering their wages and reducing their standard of living, while also preventing economic growth from occurring in the state.
Taxes aren’t simply a 1-to-1 trade-off where the government spends a dollar instead of the private sector. Tax hikes involve what is called “deadweight loss” whereby overall economic production is reduced as a result of the rising tax burden. Recent tax hikes across Illinois come on top of an already heavy tax burden and depress economic growth and job prospects in the Land of Lincoln.
A review of the academic literature on tax hikes shows policy leaders in Illinois need to reconsider their reliance on tax hikes. The Tax Foundation summarizes:
Nearly every empirical study of taxes and economic growth published in a peer reviewed academic journal finds that tax increases harm economic growth.
Of 26 academic tax studies the Tax Foundation reviewed, all but three found a negative effect of taxes on economic growth. Furthermore, of studies distinguishing between types of taxes, corporate income taxes were the most harmful for growth, followed by personal income taxes, then consumption (sales) taxes and finally property taxes.
Foremost among these studies is one by Dr. Christina Romer, President Barack Obama’s former chief economic adviser. Her conclusion:
Tax increases are highly contractionary… A tax increase of one percent of GDP lowers real GDP (that would otherwise occur) by about 3 percent after about two years.
In addition, an International Monetary Fund study of 170 cases of fiscal consolidation, which are episodes where budget deficits needed to be closed by tax increases or spending reductions, found that spending cuts are much less harmful to economic growth than are tax increases. And a data-rich panel study looking at tax differences between states, and evaluating taxation as a percent of state personal income, found a robust negative effect of taxation on economic growth. By that measure, Illinois was tied for the 5th highest tax burden in the U.S. in fiscal year 2012.
Thus, academic literature overwhelmingly reveals an overall increase in taxes is bad for growth. However, it also reveals the type of the tax matters for growth.
A 2008 Organization of Economic Co-operation and Development, or OCED, study of progressive taxation in 21 OECD countries found that:
- Income taxes are generally associated with lower economic growth than consumption taxes,
- Corporate income taxes are especially anti-growth,
- Progressivity of income taxes (rather than a flat tax like Illinois has) causes an additional negative effect on growth.
Academic literature on taxation presents sobering analysis for Illinois, considering all the recent taxes politicians have imposed in the Land of Lincoln, including those such as themillionaire tax and progressive income tax proposed and defeated in the General Assembly in spring 2016, and others now in the planning stages, Illinois has gone too far in the direction of tax hikes and done too little to control spending. For a state sorely needing more job opportunities and with a dragging economic growth, the prospect of more taxes is going in the wrong direction.
Illinois needs to reform its spending, first and foremost. At both the state and local levels, that means changing collective bargaining with government unions so government officials can present public employees with an employment package taxpayers can actually afford rather than one that forces tax hikes thwarting economic growth. Furthermore, Illinois should consider how it levies taxes, and focus less on those taxes especially harmful to growth.
At the end of the day, a tax hike on Illinoisans guarantees lower take-home pay for Illinois families and a lesser standard of living for Illinois’ future.