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Will the Last Taxpayer in Illinois Please Turn Out the Lights: An Economic Assessment of the Illinois ‘Fair Tax’

October 28, 2020
By Arthur Laffer, Ph.D., Stephen Moore, and Erwin Antoni, Ph.D.

We find that the Illinois “Allow for Graduated Income Tax Amendment” would have significant negative effects on the state’s economy and its citizens.

Executive Summary

This study examines the proposed state constitutional amendment that would change the Illinois state income tax from a flat tax to a graduated income tax. Passage of the constitutional amendment would allow the enactment of Illinois Senate Bill 687, which would raise personal and corporate income tax rates. The highest personal income tax rate would rise by more than 60 percent, from 4.95 percent to 7.99 percent. This would be one of the largest tax increases on small and large businesses imposed in any state in at least the past two decades.

In this study, we examine how similar tax changes enacted in other states over the past 60 years have affected economic performance. We also examine Illinois’ current economic performance and analyze the effect these proposed tax changes would have on the state’s future performance. Finally, we provide econometric projections to quantify the economic impact of the proposed constitutional amendment. We provide a range of estimates of job losses, outmigration, lost production and state income, and slower home value appreciation.

We find that the Illinois “Allow for Graduated Income Tax Amendment” would have significant negative effects on the state’s economy and its citizens.

Passage of Illinois Senate Joint Resolution Constitutional Amendment 1, in conjunction with Senate Bill 687, would introduce the following tax changes:

  • Increase the top personal income tax rate from 4.95 percent to 7.99 percent
  • Set the top tax bracket at $750,000 for individuals and $1 million for joint filers
  • Apply the top rate of 7.99 percent to all income (not just income above $750,000/$1,000,000) for those in the top bracket
  • Subject filers with taxable income below $750,000/$1,000,000 to a graduated tax schedule with a top rate of 7.85 percent[1]
  • Increase the top net corporate income tax rate from 9.5 percent to 10.49 percent
  • Establish a tax amnesty program for evaders of the franchise tax and license fees
  • Phase out and repeal the Illinois franchise tax by January 1, 2024

[1] Because of the switch to a flat tax above $750,000, there is a cliff effect: Filers making $750,000 would pay $51,460 in state tax, whereas filers making $750,001 would pay $60,005—a difference of $8,545.

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Watch the full presentation of the paper by the authors below.