Issue Brief: Tax Relief from the Phase-down of the Personal Income Tax Disproportionately Goes to Illinois’ Wealthiest

Many know that on January 1, 2015, the temporary increases made to the state’s income tax rates that became law under the Taxpayer Accountability and Budget Stabilization Act of 2011 (TABSA) began to phase-down. On that date, the personal income tax rate declined from 5 percent to 3.75 percent, while the corporate rate went from 7 percent to 5.25 percent. What is not well known is:

• who benefited most from the cut to the personal income tax rate under TABSA, and
• whether or not that tax cut can reasonably be expected to stimulate the Illinois economy.

As it turns out, more than half (54.4 percent) of the dollar value of the tax relief from the reduction in the state’s personal income tax—over $2 billion of the $3.7 billion in total cuts—goes to the wealthiest 11.8 percent of tax filers in Illinois. Indeed: 

• Millionaires do particularly well, as they will receive an average annual tax break of $36,797 per year. To put that in context, the average annual tax break for millionaires under TABSA will be anywhere from 70 to 344 times more than the average, annual tax break the phase-down generates for the bottom 70 percent of Illinois families, who have net taxable incomes of $50,000 per year or less.
• The bottom 50 percent of income earners in Illinois will fare particularly poorly, receiving just 8.1 percent of the total tax break generated by the phase-down of the state’s personal income tax rate.
• So much of the tax relief provided under TABSA goes to upper income families in Illinois, that it will actually worsen income inequality in the state.

Finally, by focusing the majority of tax relief on top income earners, the phase-down of the personal income tax rate cannot be expected to generate much economic activity. That’s because the economy is primarily made up of consumer spending, and typically, affluent families are not likely to spend most of the tax relief they receive, because their disposable income is already increasing significantly over time. Given this growth in disposable income, affluent families do not have significant unmet needs, and tend to save rather than spend what they receive in tax relief.

Low and middle income families, however, have greater unmet needs because in real terms their earnings are declining over time.1 So when low or middle income households obtain an additional dollar of income—say through targeted tax relief—they tend to spend that dollar in the consumer economy. Unfortunately, the bottom 60 percent of income earners in Illinois will receive only $491 million or 13.2 percent of the $3.7 billion in tax relief from the phase-down, which greatly diminishes any potential the phase-down has to stimulate spending.

In fact, to the extent that there is any mild stimulative impact that can be anticipated from the phase-down of the personal income tax rate, it will be negated by the public service spending cuts that will have to be made to pay for the $3.7 billion loss in recurring tax revenue it causes.