September 17, 2020

New 20-Year Study Provides Insight on How State Tax Systems Worsen Inequality and the Racial Wealth Gap

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Study shows cumulative impact of Illinois’s flat income tax.

A new study finds that over the last 20 years, Illinois’s tax system has effectively sapped $4 billion more from Black and Hispanic communities than it would have under a graduated income tax while also allowing the state’s highest-income (mostly white) households to pay $27 billion less in taxes, the Institute on Taxation and Economic Policy (ITEP) said today.

The study examines the long-term effects of state tax structures on economic inequality and the racial wealth gap by looking at 20 years of data on personal income tax collections in Illinois.

The state has the eighth most regressive tax system in the nation. It made an ideal case study because Illinois voters on Election Day will decide on the Fair Tax, a ballot measure to amend the state’s constitution to move from a flat personal income tax (everyone pays the same rate) to a graduated personal income tax (the rate increases based on income). The analysis compares relative tax liabilities under the current flat tax rate system to what tax responsibility would have been under the proposed Fair Tax.

“Economic inequality and the racial wealth gap are two of the defining challenges of our time,” said Lisa Christensen Gee, author of the study. “We often analyze the distributional effects of tax policies for a single year. By taking a long view and also breaking the data down by race, we find that Illinois’s flat income tax has not only shifted more tax responsibility on those with less, it also exacerbates the wealth gap by allowing wealthy white households with enough resources to pay less in personal income taxes. They can use the tax savings to invest and build even more wealth.”

Currently, families in Illinois earning less than $21,800 a year have 85.3 percent of their income post state and local taxes. Families with income over $536,4000 keep 92.6 percent of theirs. In other words, the income gap is wider post-tax. Other key findings:

  • Illinois’s flat tax structure enables the rich to build even more wealth. Illinois’s highest-income households (top 3 percent) paid $27 billion less in taxes over the 20-year period than they would have under the fair tax (holding tax collections constant). The study estimates that the tax savings allowed the richest households to build at least $50.2 billion in wealth.
  • Illinois’s flat tax exacerbates the racial wealth gap. Black and Hispanic households with income under $250,000 paid an additional $4 billion in taxes over 20 years than they would have under the Fair Tax. This was $4 billion that wealthy households did not pay. Compounded over time, this effectively enriched the state’s top 3 percent (a majority of whom are white) by an additional $7.5 billion.

Moving to the Fair Tax would change the overall distribution of Illinois’s tax system and require those with the highest incomes to pay more as a share of their income and as a total share of all taxes. In 2019, Illinoisans with more than $250,000 in taxable income paid 38 percent of all personal income taxes. Under the Fair Tax, that share would increase to 47 percent. Those with income of $250,000 or less pay 62 percent of all personal income taxes but would pay 53 percent under the Fair Tax. Illinois would improve from the eighth most regressive tax system to the 20th if the Fair Tax passes.

ITEP has produced 50-state distributional analyses of state tax systems since the 1990s. This analysis of Illinois is the first to examine the multi-year, compounding effect of tax policies that ask the rich to pay less. As federal and state policy discourse continues to examine whether to tax the rich more, data that show the effects of tax policy on short- and long-term economic wellbeing should influence the policy debate.

Here’s what some others have to say about the study:

“This analysis confirms what many of us instinctively knew: Over the past 20 years, Illinois’ tax system has systematically stripped Black and Latinx people of billions of dollars in wealth,” said Jeremy Rosen, director of economic justice at the Shriver Center on Poverty Law. “The damage this has done to communities across the state has been severe. Importantly, this brief also points us to a solution – passing a fair tax for Illinois in November 2020.”

“The data in this report prove what many families of color and low-income Illinois families have felt for years: Illinois’ tax system was built to benefit the rich at the expense of everyone else,” said Harish I. Patel, Director of Economic Security for Illinois.“If we in Illinois intend to close the racial wealth gap and give all our neighbors a fair shot, we must start by creating a fairer tax system.”

“I am in favor of the ballot proposal in Illinois to allow for a graduated income tax. As income inequality continues to grow in Illinois, a regressive flat tax makes no sense and is immoral,” said Michael Rothman, CEO of Conger Management. “I have done well, and I should pay my fair share to support the state where I live and work. Shifting more of the state’s tax burden on wealthy individuals like me will help our economy flourish, as we reduce the burden on startups and existing small businesses and provide a more level playing field for every Illinoisan.”

“When we look at current-day poverty in communities of color, we must understand the role of our tax policies in creating that reality,” said Amisha Patel, executive director of Grassroots Collaborative and Grassroots Illinois Action. “Because of the flat state income tax, Black and Latinx workers have effectively subsidized the wealth of rich white residents. We have the power to end this gross inequity by voting Yes for Fair Tax this election, ensuring that our communities have greater access to quality schools, social services, and more.”