A way to make Illinois’ tax system more fair, and boost the state’s economy
For more than three decades, flaws in Illinois tax policy have resulted in two really bad consequences.
Illinois has created the textbook definition of a “structural deficit” by allowing annual revenue growth in the state’s
General Fund to be typically insufficient to cover the cost of providing the same level of services from one fiscal year into the next. With more than 95 percent of General Fund expenditures in four core areas – education, health care, social services and public safety – the result is problematic. Add on Illinois’ consistent ranking as one of the most unfair, regressive tax systems nationally, and you have a painful net result:
If you are low income in Illinois, you pay a high tax burden yet funding for the core services that enhance your community is low.
But a combination of good fortune, federal aid, and smart choices have significantly improved the fiscal outlook this year. So much so that Illinois now projects it will have a $3.4 billion on-budget surplus in its General Fund by year’s end. To his credit, Gov.
JB Pritzker has proposed using a good portion of this surplus to pay down existing debt, fund pre-existing bills Illinois owes for things like health insurance claims
and college assistance programs, and build up Illinois’ rainy day fund, to hedge against unforeseen future problems – all of which is very responsible. There is, however, one more fiscally responsible thing the state can do that will really help families across Illinois: enact the initiatives detailed in House Bill 4920 and Senate Bill 3774.
First, the legislation would enhance the state’s existing Earned Income Credit – by increasing its dollar value as well as expanding eligibility for claiming it. Illinois’ EIC, which is based on the EITC given at the federal level,
is a “refundable” tax credit targeted to low-income workers. This effectively
puts money in the pockets of folks who need it most. And we know it works. When benefits provided under the federal EITC were increased as part of the American Rescue Plan Act, almost 1.5 million Illinoisans benefited.
The proposed Illinois legislation would also create a new refundable Child
Tax Credit to help low-to- no-income families with dependent children. Again, we know this will make a meaningful difference if it becomes law. When the federal Child Tax Credit was increased under ARPA, it benefited nearly 90 percent of Illinois children who are under age 17.
Expanding the EIC and creating a Child Tax Credit make all the sense in the world at this point in time. A growing chorus of advocates across the political spectrum recognize the predicament faced by low-income workers – the hardest hit by the pandemic’s economic damage and suffering most from the inflation spike. They believe these tax policy changes are the right thing to do – and the data agree.
For instance, as noted previously Illinois has one of the most unfair tax systems in the nation. In fact, Illinois’ tax policy is so regressive it actually worsens the growing income inequality that has manifested in the state’s private economy over the past three decades. Indeed, between 1978 and 2018, 99 percent of Illinois households saw their annual income after inflation grow by 20 percent — a far cry from those in the top 1 percent, whose inflation adjusted incomes grew by 254 percent, or more than 10 times as much. Expanding the EIC and creating a refundable Child Tax Credit targeted to low-income workers would counter that trend and help make Illinois’ tax burden fairer.
Yet, we can still feel the very real, very painful economic after-effects of COVID-19 all around us: 17 percent of Illinois adults in rental housing are behind on paying rent. More than a quarter of adults here say they have a problem dealing with daily necessities like purchasing food, paying for housing or cars, or covering medical expenses.
Expanding the state EIC and creating a new Child Tax Credit as legislators have proposed, would give up to 4.8 million Illinoisans – or about 40 percent of the state’s population – at least $600 back in tax refunds, make the state’s tax policy fairer, reduce child poverty, and support lower-wage workers. Better yet, those refunds will get pumped right back into local economies across Illinois. In fact, we estimate the state’s private sector economy will realize a stimulus that could top $1 billion if these credits are fully implemented as proposed – far more than the estimated upfront cost of about $415 million.
Now is the right time for Illinois to take income inequality head on and give working families the relief they deserve. Expanding the state’s EIC and creating a Child Tax Credit as currently proposed would be sound fiscal policy that will help Illinois build on its welcome good fiscal fortune.
Ralph Martire is executive director of the Center for Tax and Budget Accountability in Chicago.