Study: Proposed Illinois “Fair Tax” Would Wreck State’s Economy

The proposed Illinois “Fair Tax” would reduce the state’s economic output, cost 566,000 jobs, reduce housing values, and drive 1.4 million people to leave the state, a new study finds.

Three leading economists, two of whom have served as economic advisors to presidents of the United States, authored the comprehensive new study of the Illinois Fair Tax, which is on the state’s election ballot for November 3. The proposed constitutional amendment would change the state’s income tax from a flat tax to a graduated income tax for personal filers, small businesses, and corporations.

“Will the Last Taxpayer in Illinois Please Turn Out the Lights: An Economic Assessment of the Illinois ‘Fair Tax,’” written by the distinguished economists Arthur B. Laffer, Ph.D.; Stephen Moore; and Erwin J. Antoni, Ph.D., was published today by The Heartland Institute, a 36-year-old national free-market think tank based in Illinois. It is available for free online at the Heartland Institute website: https://www.heartland.org/_template-assets/documents/10-28-20%20FairTaxReport.pdf.

If approved by voters, Illinois’s 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 by any state in at least two decades, and it would not raise nearly the amount of money its proponents claim, the authors say.

“In this study, we examine how similar tax changes over the past 60 years have affected economic performance in other states,” the study states. “We also examine Illinois’ current economic performance and analyze the effect these proposed tax changes will 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 on job losses, outmigration, lost production, lost state income, and home value appreciation.”

The economists’ research says passage of the ballot initiative would harm the state’s economy in several ways. The tax, they write, would

• hit small businesses with annual profits as low as $250,000;

• slow job growth by an estimated 566,000 over the next decade, effectively eliminating about one in 10 current jobs in the state;

• result in 1.4 million people leaving Illinois for better economic opportunities, setting outmigration from Illinois at about nine times faster than the current alarming rate;

• reduce the state’s GDP by $20.5 billion over the next decade;

• reduce home value appreciation by about 10.4 percent over the next decade; and

• make Illinois one of the five highest-tax jurisdictions in the world, with only New Jersey and some Third World nations having a higher tax on corporations.

The authors find that the tax rate increase would fail to generate the promised rise in government revenue.

“[I]t is clear that the rate increases are directed at those taxpayers who tend to be both the most mobile and those who are best equipped to engage in behavioral changes to legally reduce their tax burdens,” the study states. “Of the $3.6 billion expected to be raised annually, 36 percent of this additional revenue will likely be lost due to outmigration, while another 15 percent will be lost due to behavioral changes of taxpayers. … The $3.6 billion static annual estimate is likely a gross overestimate of actual likely revenue. Instead, a dynamic estimate of 39 percent would be $1.404 billion a year, on average.”

The proposed progressive tax and large tax rate increase is a bad deal for the state, the study concludes.

“Illinois has a clear need for new revenues,” the authors state. “But raising tax rates on businesses and individuals is not the correct way to find these revenues. Raising taxes may lead to increased revenues in the short term, but over the long run, Illinois’ economy will be severely hindered by these tax changes and these new tax revenues will dry up.”

Watch the whole presentation of the paper by Laffer, Moore, and Antoni at this link, or watch the 15-minute “highlights” video below.