Diary

Illinois ‘Fair Tax’ Would Hasten State’s Economic Tailspin

Justin L. Fowler/The State Journal-Register via AP, Pool

If you live in Illinois, chances are you have been bombarded with advertisements for and against the so-called “Fair Tax.”

In short, the Fair Tax would eliminate the Prairie State’s flat income tax rate of 4.95 percent and replace it with a graduated income tax with a top rate of 7.99 percent. The Fair Tax would also raise the state’s corporate tax rate from an already high rate of 9.5 percent to 10.49 percent.

Although many on the Left are portraying the constitutional amendment as nothing more than a tax hike on millionaires and billionaires, this is simply not the case.

According to a new analysis of the Fair Tax by economists Arthur Laffer and Stephen Moore, the Fair Tax, if passed via referendum in the upcoming election, would institute even more economic carnage to a state already reeling in financial turmoil.

The report, “Will the Last Taxpayer In Illinois Please Turn Out The Lights: An Economic Assessment of the Illinois ‘Fair Tax’,” sheds some much-needed light on the economic fallout that would ensue if the Fair Tax becomes the law of the land in the Land of Lincoln.

For instance, according to the new report, “Job growth would slow by an estimated 566,000 over the next 10 years, effectively eliminating about one in 10 current jobs.”

Given Illinois’ current unemployment rate of 9.8 percent, which is well above the national average of 7.7 percent, the absolute last thing the state needs is another tax hike that would inhibit job creation.

Another key point raised in the new report is the devastating effect the Fair Tax would have on outmigration from Illinois. As the authors write, “Net migration to Illinois (people from other states moving to Illinois minus the number of people moving out of Illinois) would be negative: 1.4 million fewer residents over the next decade, due to the tax. The outmigration from Illinois would be about nine times faster than its current rate.”

At present, residents are fleeing Illinois. According to the Illinois Policy Institute, “Illinois’ population dropped by 168,700 people from 2010-2019, the largest raw decline of any state and more than the entire population of Naperville, Illinois’ third-largest city.”

The Fair Tax would only increase the number of Illinoisans who leave the state for greener economic pastures.

Even worse, for those unwilling or unable to relocate, the Fair Tax would inflict a devastating blow to the state’s anemic rate of personal income growth. According to the report, “Personal income growth would be $19.2 billion less over the next 10 years.”

Considering the fact that Illinois already languishes in 49th place among the 50 states in terms of personal income growth, the Fair Tax would further hamper the ability of Illinois residents to increase their personal income, which is a main driver of economic activity.

Which brings us the toll the tax would take on Illinois’ Gross State Product (GSP). In the first quarter of 2020, Illinois, like all the states, experienced a severe decline in its GSP. In fact, Illinois’ GSP fell by a whopping 29.7 percent in the first quarter, due to the coronavirus pandemic, primarily.

However, with lockdowns on the rise throughout the state due to the second wave of COVID-19, this would be the worst time to blunt the state’s GSP with a big tax hike.

Furthermore, as the authors note, “Home value appreciation would be 10.4 percent less over a decade, because there would be fewer people buying homes in the state.”

As mentioned above, residents are fleeing Illinois, which has had a negative effect on the value of home prices. The Fair Tax would only worsen this problem, leaving more Illinois homeowners with underwater mortgages and declining home values.

As if that were not bad enough, “Successful Illinois small businesses would be adversely impacted, and severely so, by the tax because most small business owners pay taxes through personal income taxes, not the corporate tax. Federal studies show that more than half the taxes on those filers with incomes above $500,000 are paid by small business owners and investors. A Small Business Administration study found more than half of all jobs come from small businesses.”

Illinois’ small business owners already face more than enough obstacles, the absolute last thing they need is a huge tax hike, which is exactly what the Fair Tax would burden them with.

Last, but certainly not least, “The corporate tax increase would make Illinois one of the five highest-taxed jurisdictions in the entire world. Only New Jersey and a handful of third-world nations would have a higher tax on corporations. Corporate headquarters would move out of Illinois as a result.”

Even before the Fair Tax was floated, corporations were leaving the Land of Lincoln, due to its high taxes, onerous regulations, and other anti-business policies. The Fair Tax, which would hike the corporate income tax rate to 10.49 percent, would be the nail in the coffin for any corporation with the wherewithal to relocate.

As shown, the Fair Tax, despite its name, is far from fair. It would crush small business, stifle job and personal income growth, and would further hasten the mass exodus that Illinois has been experiencing for decades. The Fair Tax is unfair and bad for business in a state that simply cannot afford more economic turmoil.

Chris Talgo ([email protected]) is an editor and research fellow at The Heartland Institute.