Revenue Implications of Alternative Personal Income Tax Structures in Illinois

This report provides background information and evidence-based answers in response to questions about the distribution of income in Illinois and about Illinois personal income tax system. The report provides an analysis of the current and historical income distributions of Illinois’ taxpayers along with forecasts of how the income distribution will change over the next five years.

The authors find that since the late 1970s income inequality has been rising in Illinois and that this increase has mirrored the increase at the national level. We forecast that households in the top income category will receive a greater share of income over the next five years but that the pace of the increase will be smaller than in recent history. The share of income accruing to the bottom end of the income distribution is forecast to fall initially but then reach a trough and eventually rise slightly. Overall, we expect that changes in the income distribution over the next five years will have comparatively little effect on the revenues generated by the Illinois’ personal income tax system.

Also, the authors report estimates of the distribution of tax burdens and revenue that would be generated if Illinois adopted the tax system of the comparison states of Wisconsin, Missouri, Iowa or Minnesota. Their initial findings, which assume no behavioral response to tax system changes, show that Illinois’ personal income tax system is less progressive than comparison states and that it raises less revenue than comparison states except for Missouri. Additional analyses that allow for behavioral responses to tax system changes do not substantially alter the report's basic conclusions.