Indiana & Wisconsin may look good but you better read the small print

Are these the good ol’ days for state and local taxes?

We complain about the burden, but it looks to be getting worse.

By David Roeder@RoederDavid Oct 7, 2019, 5:00am CDT

Indiana tried to woo Illinois businesses with several billboards in 2011. Sun-Times file photo

A while back, I chatted with a guy who recently retired from a government job in the northern suburbs. He had moved just over the border into Wisconsin, eager for more of a country life and to escape the high taxes in Illinois.

After settling there, however, he discovered his government pension would be taxed. Had he stayed in Illinois, it would have been left alone. He was livid.

I declined to tell him that he hadn’t done his homework. These nettling details are easy to overlook, and we all have other matters that distract us.

But it’s true. It’s easy and justifiable to criticize state and local taxes in Illinois and to react, as an individual or a company, by at least threatening to leave. You need to know what you are getting into.

Analysis

A good, user-friendly place to start that inquiry is the financial website Kiplinger, which last week posted an interactive map that lets you compare tax rates by state. It drew its information from state agencies, industry groups and the nonpartisan Tax Foundation.

In a finding that would surprise no one, Kiplinger ranked Illinois as among the least tax-friendly states. The property and sales taxes cost residents dearly. Things get muddled, though, when you look at details.

Consider, for example, our neighbor to the east, Indiana. Billboards in the south suburbs tell us it’s a low-tax haven, and personal experience affirms it. City and suburban residents have for decades crossed the state line for cigarettes and gasoline. Add in the business for fireworks, guns and gambling and you’ve got what amounts to a wide-open economy profiting from the rules in Illinois.


The Hoosier state charges a lower income tax rate than Illinois, but there’s a catch. Each county has its own income tax rate. Put the two together, and the difference is reduced or, in the case of Lake County, Indiana, almost eliminated. Illinois has no county income taxes.

Moving to Indiana probably gets you savings in property and sales taxes, but if you’re still working in Chicago or the suburbs and have bought yourself a longer commute, is it worth it?

For most wage earners, the Illinois flat-tax rate of 4.95 percent compares favorably with the sliding scales in Wisconsin and Iowa, two states that also had “least tax-friendly” status in the Kiplinger ranking. The website noted that many Wisconsin residents are in the 6.27 percent tax bracket. This isn’t an argument against the proposed graduated income tax in Illinois — it’s something most states already have. It’s just a reminder that the Legislature must yet decide who pays.

But there’s one group for which these scenarios are radically different. It’s retirees, the most protected class of taxpayers under Illinois law. Of the states that charge an income tax, only three don’t touch retirement income from pensions, 401(k)s, IRAs and Social Security. They are Mississippi, Tennessee and old high-tax Illinois, which from that perspective looks like a Midwestern haven for pensioners who don’t mind winter.

It’s a big-ticket item. An analysis by the state comptroller’s office said the retirement income exclusion cost Illinois $2.3 billion in fiscal 2015. Groups of various leanings such as the Civic Federation, the Civic Committee of the Commercial Club, and the Center for Tax and Budget Accountability have called for retirement income to be taxed.

Their board leaders and staff, however, don’t have to stand before the electorate. I suspect Gov. J.B. Pritzker knows if he goes for a retirement tax, all his wealth won’t save his political career. His larger worry is getting voters to approve the graduated income tax amendment next year, buying into lawmakers’ promises that it will fall mostly on wealthy people and reduce taxes for many others. Some will wonder if they can believe promises from the same political class that caused the fiscal problems by shorting public pensions.

The vote takes place in November 2020, by which time people could be in a surly mood. In Chicago, Mayor Lori Lightfoot will have little choice but to patch together a property tax hike, other revenue increases, borrowing, cuts and some razzle-dazzle to close a projected deficit of more than $800 million. And that’s alongside a potential teachers strike. On the state level, the slow-motion financial mash-up will get worse once it becomes obvious that revenue from marijuana sales and the gambling expansion will be long in coming and less than expected.

It’s enough to anger even the retirees. Maybe that guy who escaped to higher taxes in Wisconsin was just ahead of the game.