Illinois Income Tax Increase: Picture Not So Dire As Neighboring States Suggest

Despite Crowing, Illinois Income Tax Still Relatively Low

Since Illinois lawmakers passed a two-point income tax increase -- raising rates from three to five percent to address the state's dire budget crisis -- neighboring states have been crowing about how ugly the climate now looks in Illinois.

Mitch Daniels, Republican governor of Indiana, told reporters Monday, "We already had an edge on Illinois in terms of the cost of doing business, and this is going to make it significantly wider." And newly-elected Tea Party-backed governor Scott Walker in Wisconsin said that he would aggressively pursue Illinois employers:

"I pulled out an old bumper sticker from the '80s when Tommy Thompson was governor that said, 'Escape to Wisconsin.' That was the tourism campaign back then. But that's a message we're sending now to employers in Illinois," Walker said.

But for all this talk, we got to wondering: just how will Illinois's new income tax stack up to its neighbors?

The short answer: not all that badly.

It's a bit complicated, because most of Illinois's neighbors have progressive taxes -- like the federal income tax, they use brackets to tax the wealthy at higher rates than the poor. Illinois's flat 5 percent tax will apply to all earners.

So we decided to look at the median family income in each state, and see how much the average family will be paying in taxes. Here's how it looks:

In fact, Indiana's numbers are a bit misleading. The state also has a county-by-county income tax that every county but one has adopted. The average county rate is about 1.43 percent, raising the state's total rate to 4.83 percent on average -- just a hair lower than Illinois's rate.

And Wisconsin sure doesn't seem to have anything to gloat about.

The corporate income tax picture is more complicated still, because Illinois employs a 2.5 percent "personal property replacement tax," while states like Wisconsin apply state property taxes to businesses. Still, the 9.5 percent corporate rate that Illinois will end up with will be within a point or two of Indiana and Wisconsin, and significantly less than Iowa's top rate of 12 percent.

Meanwhile, Illinois Governor Pat Quinn made the valuable point that the income tax isn't the only thing a business will look at when choosing where to locate.

"It's important for their state government not to be a fiscal basket case," Quinn said. And indeed, the state's tax hike might well restore business confidence in Illinois's finances, as it moves to close a yawning $15 billion budget deficit.

But as long as Scott Walker in Wisconsin wants to play the blame game, he might consider the Tax Foundation's assessment of his state:

"For the past three decades Wisconsin's state and local tax burden has consistently ranked among the nation's highest," the nonpartisan research group writes.

Or for a more frank assessment, Illinois Manufacturers' Association President Greg Baise told the Sun-Times: "Wisconsin is not the mecca where everybody is going to be running off to. The last time I looked, their climate is a lot s**ttier than ours."

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