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The state of the State

Taxes and the economy: searching for cause and effect


State and local taxes per capita and per $1,000 of personal income, 1977 to 1986
 Taxes per capita
Taxes per $1,000 of personal income
Fiscal yearU.S.
$ 813.01
$ 860.29

*Includes District of Columbia.
Source: Taxpayers' Federation of Illinois.

Consider for a moment:

  • Illinois ranks 44th among all states in state taxes per capita.
  • Per capita personal income in Illinois stands ninth among the 50 states.
  • State per capita spending of elementary and secondary education stands 44th among the states.

Such numbers are being — and will increasingly be — trotted out around the Capitol as educators and human service agencies push for a state tax increase. Groups like the 75-member Coalition for Adequate Revenue for Illinois and the Coalition to Restore Illinois' System of Excellent Schools are arguing that state taxes are low and can and should be increased to provide adequate schools and human services.

The numbers are true, as far as they go. Illinois is, and has historically been, a low state tax state. Local taxes are another story. Property taxes in particular are high. Boosting state taxes will increase both the state tax burden and the combined state and local tax burden. According to U.S. Census Bureau data for the year that ended June 30, 1986 (the most current available), state and local tax collections per capita stood at $1,546.46 in Illinois. That was 16th among the states and 98 cents below the national average. Raising the per capita tax burden to the national average would generate about $10 million, a figure barely worth the acrimony of a tax hike debate.

The distinction between state and local tax burdens in Illinois is illustrated in the newest set of computations from the National Conference of State Legislatures. In a ranking of 1987 state and estimated local taxes per $100 of personal income, Illinois stood 32nd at $10.49. State taxes per $100 were $5.75, which put the state 44th. Local taxes were $4.74, or 11th among all states.

May 1988 | Illinois Issues | 10

Until 1979 Illinois' tax
capacity had run 10 percent
over national averages and
its effort at the average

Another computation of tax burden comes from the Advisory Commission on Intergovernmental Relations, a bipartisan organization charged with monitoring federal/state relations. The commission regularly computes and publishes state and local "tax capacity."

The commission weights 26 potential state and local taxes to determine what revenue governments could raise if they imposed each tax at national average rates and compares it with what states do raise. Newly published figures show that for 1985 Illinois' ability to raise taxes (its tax capacity) was 96 percent of national averages. At the same time what it did raise (its tax effort) was 106 percent of the national average. Until 1979 Illinois' tax capacity had run 10 percent over national averages and its effort at the average. In 1979 those numbers headed in opposite directions, crossing in 1981 so that the reverse is now true. Between 1980 and 1985 Illinois was the fifth biggest loser in tax capacity, as computed by the commission.

Yet another measure of tax burden comes from the Taxpayers' Federation of Illinois in its biennial Illinois Tax Climate. The federation compares Illinois with similar and surrounding states for state and local taxes both per capita and per $1,000 of personal income. Douglas L. Whitley, president of the Taxpayers' Federation, says that the measure related to personal income gives an indication of the ability to pay.

Taxpayers' Federation computations showed Illinois in 1977 with the 14th highest state and local taxes per capita among the 50 states and the District of Columbia. By 1986 the rank had dropped to 17th. (It had peaked in 1974 at sixth highest in the nation.) The same pattern was evident for taxes per $1,000 of personal income. In 1977 Illinois stood 32nd highest in the nation in 1977, a rank that declined to 34th highest in 1986.

Neither tax burden measure shows much change. What did change was Illinois' rank in per capita personal income. In 1977 the state had the 6th highest personal income per capita among the states. By 1986 that had slipped to ninth. Whitley says Illinois still has tax capacity, but that the slower growth in personal income has trimmed it somewhat.

Perhaps the broadest measure of tax burden — and its companion measure of tax capacity — would be a comparison of taxes to what is produced in Illinois, a state measure of the Gross National Product. The Department of Commerce and Community Affairs produces such a number. The department begins with personal income data and summarizes economic activity to compute the Gross State Product, an estimate of the value of goods and services produced in Illinois.

May 1988 | Illinois Issues | 11

Illinois state and local taxes compared to the Gross State Product (dollars in millions)
Year*19771978197919801981 19821983198419851986
Gross State Product $119,604$132,635$144,201$150,628$165,423$169,531$177,847$199,180$209,223$222,014
State and local tax revenue 9,67410,31011,20912,37513,30613,678 14,41816,16817,00717,866
State tax revenue 5,3205,7746,3237,0737,3237,429 7,4208,7019,2289,801
Local tax revenue 4,3544,5354,8875,3025,9836,249 6,9987,4667,7798,065
State and local tax revenue/GSP 8.09%7.77%7.77%8.22%8.04%8.07% 8.11 %8.12%8.13%8.05%
State tax revenue/GSP 4.45%4.35%4.38%4.70%4.43%4.38% 4.17%4.37%4.41%4.41%
Local tax revenue/GSP 3.64%3.42%3.39%3.52%3.62%3.69% 3.93%3.75%3.72%3.63%
* Gross State Product is reported for calendar years, and state and local tax revenue is reported for state fiscal years.
Sources: Gross State Product from Department of Commerce and Community Affairs. State and local taxes from Census Bureau.

Between 1977 and 1986 Gross State Product increased 85.6 percent. (That compares to a 90.4 percent growth in the more commonly cited state personal income.) In 1977 state and local tax revenues totalled 8.09 percent of the Gross State Product. Of that, 4.45 percent was state tax revenues and 3.64 percent was local taxes. Those numbers remained virtually unchanged for the period. By 1986 state and local revenues equalled 8.05 percent of Gross State Product, of which 4.41 percent was for state taxes and 3.63 percent for local taxes.

Because Gross State Product lagged behind personal income growth during the period, tax revenues as a percentage of personal income dropped slightly. For state and local taxes the drop was from 10.23 percent of personal income to 9.92. The state components dipped from 5.62 to 5.44; the local dropped from 4.60 to 4.48.

And, the lagging growth in the Gross State Product illustrates another cause of Illinois' state fiscal woes. Had Gross State Product grown between 1977 and 1986 at the same rate as the Gross National Product, a constant 8 percent of state and local taxes would have yielded — in 1986 — another $1.5 billion for state and local governments.

No one disputes Illinois' economic problems. And there is little debate that the better a state's economy the easier it is to provide services. But there is also a growing awareness that the services a state offers affect its economy. The Corporation for Enterprise Development attempted to make that link in a report published last year, Making the Grade: A Development Report Card for the States.

The business research group disputed "traditional" business climate measures that emphasized low business costs by holding down taxes at the cost of not building roads and sewers, investing in human service, and not enforcing environmental and health standards. "Scoring high on an index based upon this formula is a public declaration that you have a Third World economy. Indexes that emphasize these factors are not indexes of economic attractiveness, they are indexes of economic impoverishment," the group charged.

So the corporation tried to construct its own measures with four indexes. It assessed:

  • Performance — how well the state's economy was performing its job of providing citizens opportunity for a better life.
  • Vitality — how vital are a state's businesses.
  • Capacity — the state's capacity to expand growth.
  • Policy — what has state done to help foster economic growth and opportunity.

How did Illinois fare? Not well. It got a D for performance. Failing grades for rate of employment growth, unemployment and high infant mortality and crime rates more than offset good grades for per capita income and hourly earnings. It got another D for business vitality, where it ranked fourth in corporate headquarters per million persons but had low rates of new business formation, women's business and self-employed persons. On the policy index it got a C, with boosts for its labor management councils, business incubators and teacher testing.

On the capacity index the state enjoyed its best score, a B. The report card gave Illinois a boost for high per capita bank deposits and for relatively high numbers of doctors. It did poorest in numbers of students who leave the state to attend college and, with 14.5 percent of residents holding college degrees, stood 35th in that category. It was average in several other categories. Its high school graduation rate was 24th in the nation, its spending per pupil 16th, and its pupil/teacher ratios 21st.

"The Question" in Illinois this year is whether to raise state taxes to provide more money for schools and human services. There are a lot of numbers kicking around demonstrating Illinois' low state tax burden. Considerably less attention has been given its more moderate state and local tax burden. But taxes are taxes, and voters do not always distinguish between state and local taxes. Lawmakers will have to sift through and weigh all the numbers before voting on a tax hike.□

May 1988 | Illinois Issues | 12

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