Revenue Implications of Alternative Personal Income Tax Structures in Illinois

Abstract

This report provides background information and evidence-based answers in response to questions posed by an Illinois legislator. The questions are: (1) Can you describe the income distribution in Illinois and how this has evolved over the recent past? (2) Can you project out the income distribution in Illinois for the next five years and project personal income tax revenue with: (a) Illinois’ current personal income tax system? (b) a graduated rate personal income tax system comparable to other Midwestern states (i.e. Wisconsin, Minnesota, Iowa or Missouri)? (3) What personal income tax revenue would Illinois’ economy generate if it adopted the personal income tax structure of Wisconsin, Minnesota, Iowa or Missouri? (4) How are tax burdens distributed in the current tax system and how would they be different under alternative tax systems in the question above?

Our empirical analyses suggest that, compared to the four neighboring states, Illinois’ tax system collects less revenue and the revenue that Illinois does collect comes disproportionately from the lowest income categories compared to the other states. Allowing for behavioral change in response to tax-policy changes does not alter, and under some assumptions reinforces, this conclusion.