What happened to Illinois’ Economy following the January 2011 Tax Increases? A Midwestern Comparison

In January 2011, Illinois enacted legislation that: changed personal income tax rates from 3.0 percent, to 5.0 percent in 2011-2014, to 3.75 percent in 2015-2023, and 3.25 percent thereafter; changed corporate income tax rates from 4.8 percent to 7.0 percent in 2011-2014, to 5.25 percent in 2015-2023, and 4.8 percent thereafter. These tax increases are scheduled to begin to phase-out in the near future, and discussion about their impacts is intensifying.

One key issue is their impact on Illinois’ economy. A large literature in economics studies the relationship between taxation and economic activity. Economists reason that tax increases may depress economic activity to the extent that taxes raise the cost of doing business relative to other states, and if taxes reduce after tax income, they may depress household consumption (a key component of economic activity). On the other hand, if tax increases are used to finance desired public services, they could make a location relatively more desirable and result in increased economic activity. Empirical studies yield mixed results.

Ultimately, our statistical analyses demonstrate that (as of October 2013) Illinois’ level of employment has been significantly below, and level of unemployment significantly above its peers since January 2011. However, average weekly earnings in Illinois have not been significantly different from expected. Although our data are consistent with the hypothesis that Illinois’ tax increase had a detrimental impact on its economy, we cannot rule out other explanations. For example, Illinois has continued to struggle fiscally since the tax increase and has delayed paying its vendors due to its backlog of unpaid bills. Such vendors may be reluctant to hire, and thus employment may suffer. Similarly, Illinois is projected to face its own fiscal cliff in 2015 when the January 2011 tax increase is scheduled to be phased out. Illinois-based employers may be reluctant to hire because of uncertainty about Illinois’ long-term fiscal health. We hope that this analysis can be a useful component of fiscal discussions in Illinois moving forward.