One of the few positives in Illinois we’ve been able to cheer over the years has been the state’s flat income tax rate. For years, Illinois was a flat tax state surrounded largely by progressive tax states, including Iowa, Kentucky, Wisconsin and Missouri.
The flat tax helped offset Illinois’ other punishing taxes, including the nation’s second-highest property taxes and some of the country’s highest gas taxes.
But now, that income tax advantage is nearly gone. Iowa has joined the growing list of flat and no-income tax states across the country. Gov. Kim Reynolds recently signed a new set of tax reforms into law that will turn the state’s progressive income tax into a 3.9 percent flat tax by 2026.
Iowa joins Kentucky, which went to a flat 5 percent tax rate in 2018, in rejecting progressive taxation. Indiana and Michigan already have flat tax rates of 3.23 percent and 4.25 percent, respectively.
Missouri, while still maintaining a nine-bracket progressive rate structure, has been flattening its brackets. The top marginal rate is now 5.4 percent on income over $8,584, making it similar to a flat tax for most earners.
Wisconsin now stands alone as the only neighbor with a truly progressive income tax.
Illinois’ competitiveness may suffer an even larger hit this year if residents vote for Amendment 1 on the November ballot. That amendment will enshrine Illinois’ collective bargaining rights – some of the most union-friendly in the country – in the Illinois Constitution. If that happens, any labor reforms that could lower taxes will effectively be blocked.
The passage of Amendment 1 would go in the opposite direction of trends in Illinois’ neighboring states. All those states with the exception of Missouri have passed Right-to-Work laws and most have passed major reforms to limit the powers of their public sector unions.
Illinois has long been a net loser of people to every one of its neighboring states. That outflow will only grow as our neighbors increase their competitiveness.