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Exodus of Illinois taxpayers means loss of $26 billion in tax revenue

Published: Tuesday, Dec. 20, 2011 5:50 p.m. CDT

SPRINGFIELD – Illinois' reputation for political corruption and government mismanagement might have cost the state billions of dollars and an income tax increase.

Illinois netted a loss of 366,616 tax-paying households between 1995 and 2009, according to a study of Internal Revenue Service figures from 1995 through 2009 released Tuesday by the Illinois Policy Institute, a free-market think tank with offices in Springfield and Chicago.

Those households took with them $26 billion in taxable revenue, according to the study. In 2009 alone, Illinois lost 20,725 households and their $1.5 billion in taxable income.

Ted Dabrowksi, vice president of policy for the institute, said the recent tax hike might have been avoided, if those taxpayers had remained in Illinois.

"If we had more people here generating income, generating sales tax, hiring people, paying income taxes, we'd have a much better fiscal outlook," he said.

Illinois lost taxpayers to 42 states during the 14-year period of the study, including to the border states of Missouri, Iowa, Wisconsin, Indiana and Kentucky.

The higher the net loss of taxpayers for Illinois translates into a heavier financial burden for those who remain.

"This is not a study to say what exactly led to people leaving, but we do note that taxes matter to people, a good, friendly environment to business matters, bad deficits and a bad governance matters to people, and people vote with their feet," Dabrowski said.

Moline is one of the two Illinois cities that make up the Illinois-Iowa Quad Cities community. Moline is in Rock Island County, which lost 1,013 taxpayers to Iowa for fiscal 2009, according to the IRS.

"It's understandable. We haven't been able to get our act together in the state of Illinois ... for a number of years," Moline Mayor Don Welvaert said.

Illinois has watched two of its past three governors go to jail on charges stemming from corruption. During the past decade, the state has made a habit of either skipping payments or borrowing to make payments to its five pension funds and spending more than it was taking in.

Welvaert said people leave the state mainly because of the state's reputation.

In fact, Moline had the lowest cost of living of the four Quad Cities before the state hiked its individual income tax by 67 percent in January, said Welvaert.

"It's perception more than anything. People look at the state of Illinois – our governors, our state Legislature – and they want nothing to do with it," Welvaert said.

Florida, Indiana, Wisconsin, Texas and Arizona had the largest gains of former Illinois taxpayers, according to the study.

In general, people migrate because of big life changes, such as a new job, retirement or family emergency, said Lisa Neidert, a senior research associate at the University of Michigan's Population Studies Center.

Dabrowski said some people may have moved because of lower taxes in states like Texas, which doesn't have a personal income tax.

However, jobs, not taxes, factored into 33,551 tax-paying households leaving Illinois and moving to Indiana. During the time period of the study, Indiana had a higher individual income tax at 3.4 percent before Illinois jumped from 3 percent to 5 percent and a sales tax of 7 percent compared to Illinois' 6.25 percent.

For the majority of the years in the study, unemployment in Illinois hovered above the national average, and was higher than that of the five border states. Illinois' unemployment rate stands at 10 percent, while Indiana and the nation at large have unemployment rates of 9 percent.

"Jobs are a big driver of migration, so you're going to move when you've got a job opportunity, a better job opportunity, or you've lost a job," she said.

Neidert said the institute's $26 billion figure is likely more than Illinois' actual losses in taxable revenue.

Many people retire to Florida and Arizona, she said. Retiree's taxable income generally drops a considerable amount, lessening the amount the state would have gotten from them in taxes.

But those leaving Illinois has slowed in recent years, likely as a result of the Great Recession. Highly mobile middle-income earners are saddled with houses worth less than what is owed on them, or the market makes selling a house a tough prospect.

When that happens, people make do with what they have where they are, Neidert said.

The study did show that Illinois netted 32,965 households from seven states, including Michigan, New York and Pennsylvania, bringing in $7.8 million in taxable revenue.

Just like states that took taxpayers from Illinois, Illinois likely gained taxpayers from those seven states due to jobs, said Neidert.

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