Illinois Millionaire Tax | HJCRA 21

My name is Katherine Loughead, and I am the Director of State TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Projects at the Tax Foundation. The Tax Foundation is a nonprofit, nonpartisan tax policy research organization. The Tax Foundation analyzes tax policy issues at the state, federal, and global levels.

I appreciate the opportunity to provide comments regarding House Joint Resolution Constitutional Amendment (HJRCA) 21. The Tax Foundation does not take a position on legislation, but I am eager to provide information on the subject matter.

HJRCA 21 would amend the Illinois Constitution to create a 3 percentage point surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on individual income exceeding $1 million. The revenue from this surtax would be constitutionally earmarked, with 50 percent dedicated to property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. relief and 50 percent distributed to school districts on a per pupil basis. This proposed constitutional amendment would raise taxes on Illinois families and businesses in an economically damaging way, further harming the state’s competitiveness and reducing economic opportunity even for those Illinois residents who would not owe the tax directly.

If Illinois’ constitution were amended as proposed in HJRCA 21, then Illinois’ top marginal state individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source rate would increase from its current flat rate of 4.95 percent, which is relatively competitive, to a much less competitive graduated-rate structure with a top rate of 7.95 percent. For partnerships, S corporations, and trusts, which are also subject to Illinois’ 1.5 percent Personal Property Replacement Tax (PPRT), the top marginal rate would increase to 9.45 percent, putting it nearly on par with Illinois’ corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate, which is 9.5 percent when combined with the PPRT. Under this proposal, with a top marginal state individual income tax rate on ordinary income of 7.95 percent, Illinois would have the 12th-highest top rate in the country, up from the 25th-highest currently, and the second-highest top marginal rate in the Midwest after only Minnesota. For partnerships, S corporations, and trusts, Illinois would have the ninth-highest top marginal rate in the country.

Until recently, Illinois’ flat individual income tax rate of 4.95 percent was below the national median, but as the median top marginal rate has continued to drop, states like Illinois that have not reduced their income tax rates have quickly fallen behind. Since 2020, 23 states have reduced their top marginal state individual income tax rates, bringing the national median top marginal rate from 5.4 percent in 2020 to 4.7 percent in 2026. In that same timeframe, only five states and the District of Columbia have implemented increases to their top marginal state individual income tax rates on ordinary income. As such, the gulf has substantially widened between states with low income tax rates or no income tax at all and states with high income tax rates. Illinois’ current rate of 4.95 percent sits near the middle of the pack but is currently on the more competitive side of the spectrum. However, if this constitutional amendment were adopted, Illinois would definitively join the ranks of high income tax states, and that status would be solidified in the state constitution, making the negative economic effects of this policy change difficult to unwind in the future.

Furthermore, Illinois’ current single-rate, or flat, individual income tax structure yields many benefits for the state and its taxpayers and is a notable competitive advantage for Illinois. Moving to a graduated-rate structure would dismantle this competitive advantage, making it more difficult for Illinois to attract and retain businesses and higher-income individuals. The economic literature on progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. structures shows they have a negative effect on upward mobility and wage growth. One study by William M. Gentry and R. Glenn Hubbard found a statistically significant relationship between decreases in the progressivity of individual income tax structures and the probability of workers transitioning to a better job within a year.[1] They also found a statistically significant negative relationship between tax progressivity and the real growth rate of wages. Proponents of graduated-rate income tax systems tend to view them as a way to address income inequality, but research shows that higher marginal rates lead to a relocation of capital and higher earners to more favorable tax environments.[2] This not only undercuts the state’s efforts to expose high earners to higher taxes, but also reduces the income of lower-income individuals who remain, due to reduced opportunities and a less competitive economic environment.

As you consider this increase to Illinois’ income taxes, it is important to keep in mind that four out of Illinois’ five neighboring states—Indiana, Iowa, Kentucky, and Missouri—have all made a name for themselves as leaders in income tax reform and relief over the past five years, and each of those states’ income tax rates remains on a downward trajectory. Next year, Iowa’s flat rate is scheduled to drop to 3.5 percent, and Indiana’s flat rate is scheduled to drop to 2.9 percent. Kentucky has a law in place that will use continued future revenue growth to phase out its single-rate individual income tax, and this November, Missouri voters may get a chance to decide whether to amend their state’s constitution to use future revenue growth to phase out the state’s individual income tax over time.

If Illinois chooses to increase its income tax rate as its neighbors are actively and repeatedly reducing theirs, Illinois can expect to see even more residents and businesses leave the state, exacerbating an already severe outmigration problem. In the newly released IRS migration data for 2022-2023, Illinois saw the fourth-highest rate of population loss to other states, behind only New York, Alaska, California, and Hawaii.[3] The states Illinois lost the most residents to were Florida, Indiana, Texas, and Wisconsin: two states without an individual income tax and two of Illinois’ neighboring states.

Additionally, while framed as a tax on the rich, much of the tax would be paid by Illinois’ small businesses, and much of the tax burden would fall on those businesses’ employees and consumers. According to the US Small Business Administration, Illinois’ 1.4 million small businesses employ approximately 44 percent of the state’s workers.[4] The vast majority of small businesses are pass-through businesses (S corporations, LLCs, partnerships, and sole proprietorships), meaning business income is taxed on the owners’ individual income tax returns. IRS data show that nearly 73 percent of Illinois individual income tax filers with more than $1 million in adjusted gross incomeFor individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income.
For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods (AGI) had income from pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. ownership on their returns, and 65 percent of Illinois’ pass-through business income was earned by filers with $1 million or more in AGI.[5] In other words, a surtax on $1 million or more in income would be, to a sizeable degree, a surtax on small businesses.

While Illinois’ pass-through businesses would face the legal incidence of this surtax, much of the economic incidence, or the actual tax burden, would be borne by consumers in the form of higher prices and employees in the form of lower wages and fewer job opportunities. This would result in fewer economic opportunities for Illinoisians of all income levels, including many who would not owe the surtax directly.

In fact, one study by Karel Mertens and Jose Olea found a negative relationship between changes in income tax rates and the wages of both higher-income and lower-income workers.[6] Specifically, the study found a cut to the average marginal tax rate that applies only to the top 1 percent of the income distribution would increase real GDP, reduce unemployment, and have a positive effect on the incomes of those not in the top 1 percent of the income distribution, which suggests that increases to the top marginal rate affecting even just the top 1 percent of income earners would have detrimental effects on GDP growth, unemployment rates, and wages.[7]

For all these reasons, this proposed income tax increase would be detrimental to Illinois taxpayers, including individuals and businesses, as well as consumers and employees. But the question of how this new revenue would be raised is just one aspect of this proposal. HJRCA 21 also prescribes how the revenue would be used, specifying that 50 percent would be used to reduce property taxes and the other half would be distributed to schools on a per pupil basis.

While property tax relief and increased funding for schools may sound like appealing goals, creating a new narrow-based surtax on a relatively small number of business and individual taxpayers to finance these goals would create several harmful unintended consequences. In Illinois, like in most states, local property taxes are the primary source of funding for K-12 schools, with supplemental revenue coming from the state as well as from the federal government. Maintaining the property tax as the primary mechanism for financing K-12 schools makes sense because this helps maintain close ties between local taxes paid and benefits received, fostering a strong sense of local control over local residents’ tax dollars and how they are used. Shifting more school district funding responsibilities to the state—and from a broad-based to a very narrow-based tax—would weaken the currently strong tie that exists between taxes paid and benefits received, and this could erode local taxpayers’ control over local school funding and other local decisions. Notably, under this proposal, there is no guarantee that the property tax relief prescribed by the constitutional amendment would translate to a net tax cut for lower- and middle-income residents. Ultimately, local governments set their own budgets, and there is nothing in the language of the constitutional amendment to prevent local governments from simply raising their budgets to generate even more revenue once a state subsidy for a portion of local property taxes paid is put in place.

Furthermore, property taxes are a much more stable source of revenue than income taxes in general, and the revenue from a surtax on high earners would be even more volatile than from the income tax as a whole, since high earners’ business income and other investment income fluctuate substantially from year to year. As such, increasing reliance on a narrow-based, highly volatile tax to reduce reliance on a broad-based, stable tax like the property tax would inject instability into school districts’ revenue streams, making the school district budgeting process even more challenging. Ultimately, if Illinois residents wish to see their property taxes decrease, those decisions are best made at the local level during the local budgeting process. If Illinois residents wish to increase funding for schools, the property tax is the best vehicle for doing that. But trying to simultaneously increase funding for schools while reducing property taxes by shifting more of the tax burden onto a small subset of higher earners and business owners is an approach that lacks cohesion and would put Illinois in an even more economically precarious position. Policymakers in Illinois and elsewhere should heed the example of New Jersey, which adopted its individual income tax in 1976, in part to reduce reliance on the property tax.[8] Today, however, New Jersey’s income and property taxes are among the highest and most burdensome in the country.

Illinois’ 4.95 percent single-rate individual income tax is a notable bright spot in a tax code that otherwise lacks competitiveness. Instead of dismantling this competitive advantage and making individuals and businesses worse off, policymakers should adopt pro-growth tax reforms that could generate additional revenue by attracting more businesses and individuals to Illinois.

References

[1] William M. Gentry and R. Glenn Hubbard, “The Effects of Progressive Income Taxation on Job Turnover,” Journal of Public Economics 88:9 (2002): 2301-2322.

[2] Martin Feldstein and Marian V. Wrobel, “Can State Taxes Redistribute Income?” Journal of Public Economics 68:3 (1998): 369-96.

[3] Abir Mandal, “Americans Are Moving to States with Lower Taxes and Sound Tax Structures,” Tax Foundation, Apr. 20, 2026, https://taxfoundation.org/data/all/state/state-migration-trends-map-americans-moving-population-changes/.

[4] US Small Business Administration Office of Advocacy, “2025 Small Business Profile: Illinois,” Jun. 30, 2025, https://advocacy.sba.gov/2025/06/30/2025-small-business-profiles-for-the-states-territories-and-nation/.

[5] Internal Revenue Service, “SOI Tax Stats – Historic Table 2,” https://www.irs.gov/statistics/soi-tax-stats-historic-table-2.

[6] Karel Mertens and Jose L. Montiel Olea, “Marginal Tax Rates and Income: New Time Series Evidence,” Quarterly Journal of Economics 133:4 (2018): 1803-1884.

[7] Id.

[8] Janelle Fritts, Jared Walczak, Abir Mandal, and Katherine Loughead, 2026 State Tax Competitiveness Index, Tax Foundation, Oct. 30, 2025, https://taxfoundation.org/research/all/state/2026-state-tax-competitiveness-index/.