Illinois Tax Increase Hits Home for Wisconsinites

Illinois’ 32 percent increase in the state income tax is having trickle-down effects on Wisconsin, with a fiscal analysis finding an increase of $51 million in payments to our southern neighbor due to an income tax agreement. Wisconsin is hoping to capitalize on expected migration out of Illinois following the tax increase.

The Illinois legislature submitted the first state budget in two years to Gov. Bruce Rauner, which included a 32 percent income tax increase from 3.75 percent to 4.95 percent. Rauner vetoed the budget but the legislature overrode his veto and the tax increase became effective retroactively July 1.

While people working in Illinois will be paying more, the state of Wisconsin will too under an agreement called income reciprocity.

Under this agreement, employees crossing state lines between work and home only file taxes in the state where they live. Whichever state makes more money taxing that interstate income pays the other state that difference. Since Illinois just increased the amount of income tax it will collect, the Legislative Fiscal Bureau (LFB) estimates Wisconsin will owe Illinois an additional $51 million in the next two years. Wisconsin currently pays Illinois around $66 million in income tax reciprocity each year.

The LFB memo said the current reciprocity agreement does not mean a loss in the general fund because, without the agreement, Wisconsin would miss out on income tax payments in an amount roughly equal to the reciprocity payment. But under the Illinois tax increase, Wisconsinites working across the southern border will owe more taxes to Illinois, increasing Wisconsin’s payment to Illinois. If Wisconsinites do pay taxes to Illinois, they will be able to claim a greater tax credit from Wisconsin.

“Because the rate is going up by a significant amount, the amount that ultimately Wisconsin is going to have to pay to Illinois for this reciprocity is going up,” said Dale Knapp, research director with the Wisconsin Taxpayers Alliance (WISTAX).

The $51 million budget shift also comes at a time when Wisconsin is struggling to pass its own state budget due to disagreements in transportation funding.

The agreement makes tax filing easier for interstate commuters, while residents in Wisconsin who work in Illinois also confer the benefit of property and sales taxes to Wisconsin.

Wisconsin has had an income reciprocity agreement with Illinois since 1973 and Wisconsin has paid Illinois every year. Wisconsin also has income reciprocity agreements with Indiana, Kentucky and Michigan. A similar agreement with Minnesota fell apart in 2009 when Wisconsin missed payments and the two states did not agree on the amount owed.

In a joint statement, Sen. Alberta Darling and Rep. John Nygren said the increased payment to Illinois is not of much concern as more people move out of Illinois to avoid the tax increase.

“We welcome Illinois taxpayers and businesses who are ready to flee the 32 percent tax hike passed by their state legislature,” Darling and Nygren said in a joint statement. “Our budget will address the loss of revenue from their tax hike. However, we expect that effect will be temporary as more and more companies are taxed out of Illinois.”

In 2011, there was a case study of that exact scenario.

Illinois’ 2011 Tax Increase

Illinois drastically increased its tax rate once before, a temporary increase of around 40 percent from 2011 to 2015.

“It seems like we saw a little bit of an increase in movement but not a major increase,” said Knapp of the 2011 Illinois tax increase. “It takes time and just because they raise the income tax you don’t just get up and move.”

According to U.S. Census data, migration from Illinois to Wisconsin increased between 2011 and 2014 while the temporary tax increase was in place.

From 2008 to 2010, net migration from Illinois to Wisconsin averaged about 9,479 per year. From 2011 to 2014 while the temporary tax increase was in place, that number jumped 14 percent to 10,794.

When Illinois lifted the tax in 2015, migration from Illinois to Wisconsin decreased by ten percent, meaning more people living in Illinois stayed there after the tax decreased back to 2010 levels. In the same year, Wisconsin migration to Illinois was at its lowest point in 10 years.

For each of the last three years, Illinois has had more people leave the state than any other state in the nation.

Who is Leaving Illinois?

One of the largest Illinois transplants in recent years was the shipping and industrial supplies distributor Uline, which moved its headquarters just 17 miles across the border from Waukegan, Ill., to Pleasant Prairie, Wis., in 2010, bringing 1,000 jobs with it.

“All you gotta do is drive down I-94 today and just five miles before the Illinois border, start to look at what’s happened in the last five years,” said Walter Vail, former president of a paper company while living in Illinois and now a Baileys Harbor resident.

While in Illinois, Vail incorporated his businesses in Florida for tax purposes.

“There was pure purpose in that,” said Vail. “Getting out of the state of Illinois was a pure purpose. Many of the decisions were based on business and personal tax… There’s nobody looking at Illinois, nobody.”

Even after the tax increase, the income and corporate tax rate in Wisconsin is still higher than Illinois. But taking all types of tax into account, Wisconsin has the 11th highest tax burden in the country. Illinois ranks 9th.

“For a lot of people they may say now I’m thinking about [moving] but it might be two years before they get a chance to actually do that,” said Knapp. “You will probably see some but I don’t think it’s going to be a lot.”

The state of Wisconsin hopes it will just be enough to offset the $51 million more in payments to Illinois over the next two years.