Research Project

The Earth isn’t Flat, and Neither is Illinois’— or any other state’s— Income Tax by David Merriman, Michael Disher, Francis Choi, and Xiaoyan Hu

Research Area(s): Government Finance Research; Tax Policy and Administration
Funding Source: Government Finance Research Center and Institute of Government and Public Affairs

Abstract

 The Earth isn’t Flat, and Neither is Illinois’— or any other state’s— Income Tax, discusses the many factors that determine state personal income tax liabilities and demonstrates that graduated tax rates are not the only way to achieve a progressive tax system. The authors looked to Illinois to illustrate this point. In 2011, Illinois had one statutory state income tax rate of 5%. However, the share of income that tax filers actually paid varied from below zero to more than 5%. The report comes as Illinois and other states consider different plans for expanding their Earned Income Tax Credits (EITC), which supplement the earnings of low-wage workers. The authors note that the EITC is an important driver in the variance between rates. Another factor that can make the rates tax filers pay differ from the statutory rate is that states often cap the value of tax exemptions and tax credits. Tax filers may face abrupt shifts in rates when their incomes rise and they hit the cap on a credit or an exemption. Read the full paper here. Read a summary of the research here.