Illinois moves into the top 20 personal income tax states

When state lawmakers voted last week to override Gov. Bruce Rauner’s budget veto, the personal income tax rate Illinois residents pay increased – and so did Illinois’ ranking among all 50 states.

Illinois had ranked 33rd with its 3.75 percent rate. With the personal income tax rate rising to 4.95 percent, Illinois’ rank bumps up to 16th, according to tax-rates.org.

Despite the increase, Illinois’ tax rate is still less than the other flat-tax states of North Carolina (5.49 percent), Massachusetts (5.1 percent) and Utah (5 percent), according to the Federation of Tax Administrators.

Four other states – Pennsylvania, Colorado, Michigan and Indiana – also tax household incomes at a single rate. Seven other states – Alaska, Florida, Texas, Wyoming, Washington, Nevada and South Dakota – have no income tax at all, and the other 35 states have progressive tax rates, meaning people pay different rates based on how much or how little they make.

Annually, the personal income tax hike will bring in an extra $4.3 billion a year, according to Ralph Martire, executive director of the bipartisan Center for Tax and Budget Accountability. The corporate income tax – which increases from 5.25 percent 7 percent – will raise an additional $460 million a year.

Jackie Perlman, a tax analyst at The Tax Institute at H&R Block, said a single taxpayer making $50,000 a year will pay around $287 more in 2017 compared to 2016 and $574 more from 2016 to 2018.

A married couple making $100,000 annually will pay about $574 more this year over last year; the increase from 2016 to 2018 is estimated to be about $1,148.

Laurence Msall, president of The Civic Federation, said although the new state budget – two years in the making – doesn’t solve all of the state’s long-term financial problems, it ends the “experiment” of operating without a budget.

“This is far from a panacea, but it is an improvement,” Msall said.

Jared Labell, executive director of Taxpayers United of America, compared fixing the state’s financial problems, as well as the impact the income tax hike could have, to a game of “Jenga.” The game of stacked pieces relies on a sound infrastructure to keep from toppling – which is not unlike a state government, he said.

“The tax increase isn’t a solution to (the state’s financial problems),” Labell said. “The impact of this hike would be felt much sooner than the budget impasse. There would be more economic stagnation and more people will leave the state, and the more people who leave the state, the worse it will be for those who stay.”

Robert Otter, budget director for the Center for Tax and Budget Accountability, said the tax hike will give the state revenue it “desperately needs.”

“Last year, the government spent roughly $6 billion more than it took in,” Otter said. “The lack of a state budget means the government can’t fund services that people want. This will allow the state to stabilize services like health care, human services, education and public safety, but we need more than this to pay the backlog.”

Here’s a list of the states with highest average income tax rates:

California – 7.75

Oregon – 7.73

Minnesota – 7.53

Maine – 7.23

Vermont – 7.18

Hawaii – 7.01

New York – 6.05

Wisconsin – 5.94

North Carolina – 5.49

Connecticut – 5.4

Massachusetts – 5.1

Idaho – 5

New Hampshire – 5*

Tennessee – 5*

Utah – 5

Illinois – 4.95

Iowa – 4.92

Rhode Island – 4.83

West Virginia – 4.8

Delaware – 4.71

Source: Tax-Rates.org; Forbes.com

*The tax for Tennessee and New Hampshire applies to investment income, but not salaries and wages.