Dupage Policy Journal

To all those Illinoisans who opposed the progressive tax back in 2020: you’re being proven more right every day. 

Illinois would have become even less competitive at a time when more and more states are increasing their economic competitiveness by moving to a flat income tax.

This year alone, four states decided to transition their individual state income tax from progressive to flat:

• Iowa passed a law that will turn its progressive tax into a 3.9% flat tax by 2026.
• Georgia’s income tax is scheduled to convert to a 5.49% flat rate by 2024. 
• Mississippi will go from a progressive tax to a flat tax next year.
• Arizona, after a lengthy court battle, has finally won the right to transition to a 2.5 percent flat income tax in 2024.

There are also movements in Wisconsin and Oklahoma to make those states’ taxes flat as well.

Both Georgia and Arizona’s change to a flat structure are not automatic and must  meet certain financial conditions to occur. Still, the fact that so many  states are moving towards a flat income tax structure – or to no income  tax at all as Tennessee did in 2021 – should tell Illinoisans something: they dodged a bullet by rejecting Gov. Pritzker’s progressive push.

In contrast, the last state to switch to a progressive tax structure was Connecticut in 1996.  Progressive tax structures are increasingly becoming outdated.

There’s  a downside to so many states moving to a flat or no income tax:  Illinois is losing one of its last competitive tax advantages. For  years, Illinois was a flat income tax state surrounded largely by  progressive tax states, including Iowa, Kentucky, Wisconsin and  Missouri. 

The flat tax helps offset Illinois’ other punishing taxes, including the nation’s highest property tax and the country’s second-highest gas taxes.

But now that income tax advantage is  nearly gone. Kentucky went to a flat 5 percent tax rate in 2018. Iowa  will go flat by 2026. Indiana and Michigan already have flat tax rates  of 3.23 percent and 4.25 percent, respectively.

Missouri, while still maintaining a nine-bracket progressive rate structure, has been flattening its brackets. The top marginal rate is now 5.4 percent on income over $8,584, making it similar to a flat tax for most earners.

That leaves Wisconsin as Illinois’ only neighbor with a truly progressive income tax.

Illinois’ competitiveness may suffer  an even larger hit this year if residents vote for Amendment 1 on the  November ballot. That amendment will enshrine Illinois’ collective bargaining rights – some of the most  union-friendly in the country – in the Illinois Constitution. If that  happens, any labor reforms that could lower taxes will effectively be  blocked.

The passage of Amendment 1 would go in the opposite direction of trends in Illinois’ neighboring states. All those states with the exception of Missouri have passed Right-to-Work laws and most have passed major reforms to limit the powers of their public sector unions.

Illinois has long been a net loser of people to every one of its neighboring states. That outflow will only grow as its neighbors increase their competitiveness.