Last month, New York governor Andrew Cuomo and Illinois governor J. B. Pritzker stood together to blame the 2017 federal tax cuts for the flight of high earners and middle-class families from their states. But just days before, Cuomo admitted he knows something Pritzker seemingly doesn’t: They’re leaving to escape painful progressive state income taxes.
Cuomo said New York took a $2.3 billion hit in income-tax revenues. He panned any new tax on millionaires.
But that message isn’t getting through to Illinois, where Pritzker wants to mirror the failed tax structure in New York by replacing Illinois’s constitutionally protected flat tax with a progressive income tax.
Such a move would be disastrous for Illinois’s economy, forcing middle-class families and high earners, as well as job creators, to leave at an even faster pace. And it wouldn’t ultimately solve the state’s serious fiscal crises or even raise the $3.4 billion Pritzker promises.
We ran the numbers at the Illinois Policy Institute, and on its face the plan is about $1 billion short of the governor’s goal. A dynamic estimate that accounts for how people would react to the tax paints a worse picture, leaving the plan about $2 billion shy of the promise.
After delaying a Freedom of Information Act request for the governor’s tax-hike math, his office finally sent a brief response filled with overly optimistic assumptions. They got the number wrong for the past five years of Illinois’s economic growth. Then, starting too high, they failed to correct for the economic slowdown or recession most economists predict will hit by 2021. Perhaps Cuomo should tell Pritzker what happens when you shoot with a bent sight.
Illinois lost more than 45,000 residents last year; only New York lost more. That is Illinois’s fifth consecutive year of worsening outmigration. Illinois’s change in population since 2014 is in raw terms worse than that of any state in the nation — 157,000 people are just gone.
The state with the biggest resident gain is Florida. Sunshine may make it more appealing than New York or Illinois, but it’s the no-state-income-tax climate that’s the draw.
More broadly, states with a progressive income tax are losing people to states with more-competitive tax climates. The trail of people, their incomes, and their businesses leaving high-tax states such as California, New York, New Jersey, and Illinois for low-tax locales such as Texas, North Carolina, and Florida is now indisputable. Since North Carolina adopted a flat tax in 2013, its growth in gross domestic product has catapulted, from over 30 percent slower than average to over 30 percent faster.
Illinois, on the other hand, hiked taxes in 2011, costing the state’s economy almost $56 billion. And in 2017 it raised taxes again by 32 percent, the largest permanent income-tax hike in the state’s history.
“Taxing the rich” always encourages the rich to leave. And tax hikes never end simply with the highest earners; working families always end up paying more, too.
Pritzker was trying to sell a tax hike he initially said would provide relief for 97 percent of taxpayers, but weeks later that “cut” changed to a pledge that 97 percent would not see an increase. Give it more time, and when the tax hike fails to bring in enough money, as it inevitably will, Pritzker will have to raise taxes on middle-class Illinoisans. The millionaires will be gone.
So will the job creators. Pritzker’s tax scheme would reduce employment by the equivalent of up to 30,000 full-time jobs. And it’s particularly bad timing, as workers can find jobs elsewhere in the country’s currently robust labor market; Illinois workers have shown little hesitation to leave for those opportunities.
The progressive tax could cost the state up to 30,400 jobs and $11.2 billion in lost economic activity. It would drop the ranking of the Illinois business-tax climate to 48th in the nation, the Tax Foundation estimated.
All that damage awaits after the rates Pritzker promised on March 7. His “tax cut” already changed to “no tax hike,” but what if Illinois amended its constitution without any rates attached? Might as well vote for open season on taxpayers.
With more than $133 billion in unfunded pension liabilities and a continually unbalanced budget, Illinois’s government should restrain spending and create a climate that attracts high earners, hard workers, and job creators. Under such policy, the working class and poor would also be protected.
For more than a decade, states that have streamlined their taxes and created a business-friendly climate have encouraged job growth and attracted new residents. Many of them are in the Midwest, where Illinois sits as a shrinking island in a sea of growing states.
Pritzker wants to ignore history and hard facts to embrace a tax climate proven to fail. Against the backdrop of a booming national economy and thriving labor market, his fight looks all the more foolish.