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Illinois Fair Tax Vs. Flat Tax: The Illinois Outmigration Myth

Written by Ken Gaebler (with support from Curtis Black)
Published: 9/14/2020

Opponents of the Illinois Fair Tax say people will leave Illinois if the Fair Tax passes. In fact, the opposite is true: people will leave Illinois if the Fair Tax doesn't pass.

In November, Illinois voters will decide on the Fair Tax Amendment, with Yes votes unwinding a flat tax system that has been in place since 1969 and transitioning the state to a fair, or graduated, tax system.

Illinois Fair Tax: Will the Rich Leave Illinois?

If the Illinois Fair Tax passes, the poor and the rich will no longer be taxed at the same rate for income tax.

The projections are that, with a Fair Tax in place, 97 percent of Illinois residents -- the employees that drive the Illinois economy and 98 percent of business owners -- will get a tax break.

Illinois' wealthiest residents, the other 3 percent who earn more than $250,000, will pay more in 2021, after having been able to pay less than their fair share for 50 years.

Representing the wealthiest 3 percent, the opponents to the Fair Tax amendment are calling it a "tax hike," which is ridiculous. It is a tax cut for 97 percent of Illinois residents.

This type of bizarre spin by opponents is jaw-dropping, but they are the masters of distortion.

They quote crackpot data sources like WalletHub (shame on you, WalletHub, for half-baked tax rate analysis) to suggest that Illinois taxes are high when they are instead very low, especially historically and particularly in light of Illinois being one of very few states that doesn't tax retirement income.

Their campaign is all FUD: Fear, Uncertainty and Doubt -- which unfortunately works well on the American public.

One of the Fair Tax Opponents' Biggest Lies: Out-Migration

Today, we will focus on the opponents' favorite lie: that people are leaving Illinois because of high taxes, and that the Fair Tax would accelerate that so-called "exodus."

The state's wealthiest man, Ken Griffin, who is one of the three percent who will benefit most if the Fair Tax is not passed, just donated $20 million to defeat the Fair Tax.

At his press conference announcing his donation, he said "I am a man who takes pleasure in winning at all costs, and I do whatever is necessary to get every possible penny of profit, others be damned, the State of Illinois be damned, and the poor be damned. Fairness is for the weak. Bow down to me, Illinois, and do as I say."

No. I'm joking. He didn't say that. He didn't say anything like that.

Instead, he said "People aren't waiting until November to vote against the economic hardship created by Springfield's spending addiction -- they've been voting with their feet for the past decade as Illinois has lost more residents than any other state in the nation."

Fake news, Ken.

Journalist Curtis Black shared his notes with me on why this just is not true. Here is the true story:

  • Yes, Illinois' population is declining. No, it's not because of high tax rates, and no, it's not experiencing out-migration at a rate that is higher than the national average.
  • In fact, according to a 2017 analysis by the Center for Tax and Budget Accountability (CTBA), the number of people moving out of Illinois is below the national average for state out-migration,
  • Even the Chicago Tribune, which loves to talk about the "Illinois Exodus" in its editorials against the Fair Tax, reports that Census Bureau figures show Illinois is "near the middle of the pack" among states for domestic out-migration.
  • The state's population is decreasing not because people are being driven out, but because birth rates are low and immigration numbers have declined. Since CTBA's study, out-migration numbers in Illinois have continued to go down.

The Reality Is a Flat Tax System Causes Outmigration and Fair Tax Cures It

If we were to believe that high taxes drive people to leave a state, we need to look at taxes holistically and isolate cause and effect.

Because Illinois has had a flat tax system, which most experts believe is a bad tax system to drive economic growth and fund a high-functioning state, it has swirled into a financial abyss.

Blame that on whatever you might but know that you have the wrong answer if you are not blaming the flat tax system for the lion's share of Illinois' fiscal problems.

But even if you want to be wrong about that (um, why?), know that the Tribune's own reporting indicated that relatively few people cited fiscal problems as their reason for leaving Illinois.

In fact, according to the Census Bureau, the most common reason for moving out of Illinois is a job transfer or job offer, cited by one third of respondents. Number two is to be closer to family. Number three is lower housing costs.

Still think income tax rates are why people leave Illinois?

Consider these facts, says Curtis Black:

  • For white Illinoisans, the top destinations include St. Louis, where most income is taxed at a higher rate than in Illinois, and Minneapolis, where income tax rates are higher and steeply graduated.
  • For black Illinoisans, the top destinations include Atlanta, where most income is taxed at a higher rate than it is here; Wisconsin, where most income is taxed at a higher rate, and rates rise steeply for higher income levels; and Indiana.
  • Indiana is a special case. In addition to a low, flat state income tax, many Indiana counties also levy income taxes. A large proportion of Chicago area residents have moved to Lake County, Indiana, where the county income tax added on the state tax brings rates very close to Illinois' level.
  • What Lake County and many other places have are lower property tax rates. Illinois has the second highest property tax burden in the nation due to its failure to fund schools adequately at the state level -- a result of the regressive tax structure created by the flat tax, which fails to capture revenue where incomes are growing, at the top of the ladder.

Black's observations about Lake County and property taxes make it clear that you cannot just look at income taxes alone.

When you factor in sales tax and property tax, Illinois' tax rates do get high, but only for its lower income taxpayers. They pay double the tax rate of the rich. (Just a few years back they paid triple the tax rate of the rich.)

The rich complain about high taxes but they stay. It's just a ploy to avoid their low and rich-friendly tax rates getting higher.

Rather than pay up, the rich instead push the tax burden down to the poor and middle class. If anyone were to actually decide to leave Illinois, it would be the poor and middle class. They are the ones who are getting stiffed by a flat tax system, and who are thus feeling pressure to go to more friendly states.

To the extent that you believe high taxes cause outmigration, you would support the Illinois Fair Tax, not oppose it.

The Rich Do Not Leave States After Tax Increases. Period.

But, again, let's be clear: people don't leave a state because of taxes, and this is true not only for the 97 percent, it is also true for millionaires:

  • A 2016 Forbes Magazine article noted that a group of researchers from Stanford University and the U.S. Treasury Department found millionaires hardly ever move from one state to another for any reason, and when they do there is little evidence that their choice is driven by taxes.
  • Illinoisans earning over $100,000 a year who move out of state (only some of whom would be affected by Fair Tax rate changes) are, according to a CBTA report, in fact most likely to move to East and West Coast cities where income tax rates are much higher than they are here.
  • During the period that Fair Tax opponents say tax rates were leading the rich to leave Illinois, Chicago attracted more new residents earning $over 100,000 than any city besides New York between 2010 and 2016. And Chicago attracted more people earning over $200,000 a year than any city in the country.

After Raising Taxes, Illinois Had More Wealthy People, With Higher Incomes

To further investigate whether tax increases might cause the rich to leave Illinois, I pulled Illinois tax receipt data from a recent period when Illinois taxes went up.

I wanted to see for myself what happens when taxes go up. So, I picked a year that had a big tax increase.

In 2011, Illinois raised its individual income tax rate from 3% to 5%, a 66% increase. (FYI it had been at 3% from 1990 to 2010, just in case you wanted more evidence that Illinois is historically, a ridiculously low tax state. That's what caused our problems here, people.)

If you believe what the hoodwinking opposition to the Fair Tax says, surely you'd expect a big exodus of wealthy taxpayers after that.

So what happened in 2011 after our big income tax increase? Did the rich flee Illinois in droves in 2012? No, in fact, it seems the opposite occurred.

In 2011, Illinois received 42,427 tax returns from people earning over $500,000. In 2012, that number jumped to 50,954.

In other words, we had a 20% increase in wealthy taxpayers immediately after the biggest tax increase Illinois had seen since 1969, when our current flat tax system was enacted.

In addition, the average earnings for a wealthy taxpayer making over $500,000 was $1.44 million in 2011. In 2012, it jumped to $1.66 million. After Illinois' biggest tax increase ever, the average wealthy citizen did better than ever.

That's not spin. That's not a con job. That's math.

Illinois Fair Tax Is Good for Everyone

You now know that the opposition's outmigration story is one big lie.

What I'd also like for you to know is a few of my favorite reasons why the Fair Tax is good for Illinois:

  • Employees will get a tax break. That is good for employers. It's good for businesses. Right now, a business owner has to pay employees more because they are overtaxed.
  • 98 percent of business owners will get a tax break. That's right. When you hear the opposition saying the Fair Tax will hurt businesses, they simply mean it will hurt the Ken Griffins of the world. Very few businesses pull out over $250,000 from a business. I ran a successful business for twenty years and never pulled out that much until a partial exit.
  • This claim that small business owners will be hurt is 100% false. I am calling business owners in Chicago and around the state in support of the Fair Tax, and not a single one opposes it. You have to be a far-right conservative business owner to oppose it, and that is just a worldview I have never understood. These are people who say they are for free markets and competition, and then push people into the ground so they can't compete. What?
  • If you are concerned about big businesses paying too much corporate tax, don't be. A report by the Institute of Taxation and Economic Policy shows 91 of the country's 379 largest companies paid an effective federal tax rate of zero or less. If you are an Illinois resident, your income tax, sales tax and property tax are high because they don't pay.
  • If you are worried that we won't be competitive with surrounding states, don't be. Compared to the highest tax bracket rate for surrounding states, the majority of Illinois taxpayers will still face a tax rate lower than all but one surrounding state -- Indiana. But in Indiana, counties impose a local income tax, so that's not a fair comparison, no pun intended.
  • People in Southern Illinois stand to benefit the most from the Illinois Fair Tax. Money from across the state goes to Springfield and then gets redistributed across the state. Southern Illinois gets back more than they pay in. Voting against the Fair Tax will prevent them from getting a tax cut and will minimize the investment they get from the rest of the state.
  • The myth of Illinois spending recklessly should also be quashed. The state's fiscal challenges are not due to overspending on services. In real dollars, Illinois spending on health care and other services has dropped sharply over recent decades.
  • Our problems in Illinois are not due to excessive pension benefits for state employees, either. More than half of the $100 billion increase in the state's pension debt over the past two decades was a result of borrowing from pension funds to cover revenue shortfalls in the state budget, according to CTBA. Pension benefits contributed just 6 percent to that increase.
  • The flat tax is a racist system of taxation. You cannot be for racial justice and support the flat tax. Those two things are at odds with each other and they cannot co-exist. I will be writing more about this in the weeks to come. If you vote against the Fair Tax, does that mean you are a racist? It depends on how you define racist. Talk amongst yourselves.
  • The Fair Tax will help stabilize the state's finances bringing more certainty to the system (which businesses value for tax planning) and potentially stronger credit ratings -- which will reduce borrowing costs on the state and local level. This is good for Illinois and good for businesses. You don't get out of this jam with the flat tax, believe me.
  • Last but not least, the human side. Not relevant to Ken Griffin et al, but perhaps you have feelings for your fellow Earthlings. If this doesn't pass, there will be drastic cuts in education, healthcare, transportation, infrastructure and social services. If you vote No to the Fair Tax, people are going to suffer in a big way. If you vote Yes, you show love for others and you will be helping people in a big way. Your call.

Flat Tax Systems Are Bad Tax Systems, and Illinois Has Paid the Price

To reiterate, what the opposition refuses to acknowledge is that all of the state's problems -- from service cuts to pension problems -- stem from the flat tax decision in 1969. The flat tax is root cause for all that ails Illinois

A flat tax framework stops Illinois from raising sufficient revenue due to the state's failure to tax the highest income earners -- like billionaire Ken Griffin -- at appropriate levels. Not raising that revenue creates a dysfunctional state. It's very simple.

Remember, the Fair Tax approach is used by the federal government, and the vast majority of states. It is the more sensible tax system of all the options.

I will be honest. I am worried that the lies of the opposition will leave Illinois stuck with the flat tax for another twenty years. If so, things are going to get really ugly for Illinois.

If you don't like the way things are looking now, and we don't get this Fair Tax passed, fasten your seatbelts for an even bumpier ride.

It is not going to be pretty.

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