In 2011 Illinois raised its personal income tax by 67 percent, taking an additional week’s pay from every worker in the state. According to new data from the Internal Revenue Service, or IRS, many higher-income Illinoisans opted out of paying these higher taxes by leaving the state. For the first time ever, Illinois drove away population and wealth to every single state in the Midwest. And the two states that gained the most Illinoisans in absolute numbers were Texas and Florida, neither of which imposes an income tax.
In the first year of the income-tax hike, the average adjusted gross income, or AGI, of taxpayers leaving Illinois jumped by $8,000: to $63,000 in 2011 from $55,000 in 2010. Never before has the average income of people leaving the state risen so much in one year. Meanwhile, in 2011 the average income of people entering Illinois increased to $53,000, up by only $4,000 over 2010 levels. As a result, the difference in the average income of people who entered Illinois compared to people who left Illinois widened to almost $10,000, by far the largest margin ever.
Comparing 2010 to 2011 illustrates the exodus of higher-income earners from Illinois in the first year of the income tax hike. In fact Illinois had a larger net loss of taxpayers in 2010 than in 2011, but the people who left in 2011 made a lot more money. In 2010 Illinois had a net loss of 24,811 taxpayers to other states, along with a net loss of $1.9 billion of annual adjusted gross income. In 2011 Illinois had a slightly lower net loss of 24,015 taxpayers to other states. However, those taxpayers who left in 2011 took with them $2.5 billion in adjusted gross income. So even though the net loss of taxpayers dropped by 3.2 percent from 2010 to 2011, the net loss of income shot up by 31.6 percent.
What does this mean? While Illinois lost roughly the same number of people in 2011 as in 2010, an extra $600 million in annual earnings walked out the door in 2011. This is an ominous trend for a state that already has debts that far exceed its tax revenues.
The fallout from the 2011 tax hike proves that Illinois can’t impose a progressive tax or even a millionaire’s tax without its resulting in a massive self-inflicted economic wound. Illinoisans have been leaving the state for years, and wealthier Illinoisans responded most strongly to the 2011 tax hike. Never before has the average income of people exiting Illinois risen so much in one year. And never before has the spread between the income of people entering the state and people leaving the state been so great.
Illinois’ most mobile residents are the people the state can least afford to lose. The IRS is scheduled to release taxpayer migration data for tax years 2012 and 2013 over the next two months, which will reveal whether this trend continued during the second and third years of Illinois’ income tax hike. The reaction to the 2011 tax increase, however, points to the folly of substituting yet another tax hike for the drastic fiscal reforms Illinois so desperately needs.
Michael Lucci is Director of Jobs and Growth for the Illinois Policy Institute.