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Some Survey Data on Perceptions of the Tax Burden in Illinois

Are Taxes Always Lower on the Other Side of the Border? Some Survey Data on Perceptions of the Tax Burden in Illinois

Brian J. Gaines and James H. Kuklinski

 

How accurate are public perceptions of the relative tax burden in Illinois? In the autumn of 2006, we asked a sample of Illinois residents a small battery of questions about tax rates in the state, as part of our ongoing Illinois Opinion Monitor project.

In surveying the general public, there is frequently a tradeoff between precision and feasibility. For example, few, apart from experts, can discuss marginal tax rates, use the jargon of “exemptions,” “deductions,” “progressivity,” and the like. It would probably be pointless to ask respondents about the relative shares of state excise taxes, federal taxes, and local taxes in the gasoline tax burden. And so on. We settled on a fairly simple format. We asked:

How do you think taxes here in Illinois compare to those in the other states?

with the possible answers being:

Illinois is in the bottom 1/3
Illinois IS in the middle 1/3
Illinois IS in the top 1/3
and
Not sure

Among the taxes we asked about were gasoline taxes and state income taxes.

For several years, gasoline prices have been highly newsworthy, as they’ve steadily risen and even set new (inflation-adjusted) historical highs. In news stories, it is sometimes mentioned that taxes (federal, state, and local) make up about one-fifth to one-fourth of the pump price. Moreover, the states vary in the gasoline taxes they charge. Illinois is, by almost all accounts, one of the priciest states for filling up. The American Petroleum Institute and Tax Foundation, for instance, place Illinois as having the fourth highest effective gasoline taxes per gallon, behind only Hawaii, New York, and California.

When asked how Illinois gas taxes compare to those elsewhere, our respondents tended to get the facts right: 61 percent said Illinois was in the top third, compared to 17 percent saying it was in the middle third, only 2 percent saying the bottom third, and 20 percent saying that they weren’t sure. Before we applaud their accuracy, an obvious hypothesis is that most people might think that all of their taxes are comparatively high. We can turn to perceptions of the income tax to see if that’s true.

Objectively, state income taxes are not nearly as simple to compare. Some states have only one (flat) rate, some have as many as 10 brackets. The states also vary greatly in personal exemptions. Illinois assesses a flat income tax of 3 percent, with a $2,000 exemption for single individuals, $4,000 for couples, and an additional $2,000 child credit. Some states have higher values; some have no exemptions. Nine states assess no income tax at all, and can thus immediately be identified as having lower income taxes. Twelve states have a higher flat rate than Illinois, or else have multiple rates, the lowest of which is higher than 3 percent (and also do not have sufficiently more generous exemptions to offset these higher rates). Ordering the remaining 29 states is a rather complicated task.

Objectively speaking, though, Illinois is probably in the bottom third, when we average across the whole tax-paying population. Three percent is actually the minimum highest rate for those states with an income tax, and most of the states with multiple brackets assess a higher rate than 3 percent on most of their residents. There is, however, some ambiguity about the task we gave our survey respondents. Whether one’s own effective rate is in the top, middle, or bottom third depends on that taxpayer’s traits. Of course, we didn’t explicitly ask people to focus on their own taxes; however, most people’s knowledge of tax rates is likely to be heavily based on their own experience. For wealthier taxpayers, Illinois income tax is almost certainly in the bottom third. That is, such individuals would pay more in income tax if they accrued the same income in at least 34 other states. For poorer taxpayers, by contrast, the income tax bill in Illinois might well be in the middle of the pack.

Our first interest is whether people see uniformly high taxes across all types of taxation. Judging by the two questions discussed here, the answer is no. Our respondents were about evenly divided between the answers “top 1/3” and “middle 1/3,” with 36 percent and 35 percent having chosen those categories, respectively. Only 7 percent reported that Illinois is one of the 17 states with the lowest income tax rates. Another 22 percent said they didn’t know the answer. Compared with answers on gasoline taxes, then, we see about the same rate of self-professed ignorance, but a much more even distribution across those willing to venture an opinion. It does not seem to be true that survey respondents simply gravitate to the “highest” answer, assuming the worst about their own tax burdens.

To be sure, we have no evidence here of under-estimating the tax burden. Despite the ambiguity about exactly how to rank Illinois on income tax rates, it seems clear that a large number of respondents are over-estimating how high their income taxes are, in a comparative sense.

More interesting is the variation in answers according to respondents’ own (self-reported) incomes. Figure 1 omits the “don’t know” respondents and shows what proportion of the others chose the answers top, middle, and bottom, according to their own income categories. (The categories shown here group together multiple intervals from our original family income question, and have roughly equal numbers of respondents.) Interestingly, we see some evidence that respondents’ own incomes play a role in how onerous they think is the income tax burden in Illinois. No one earning under $30,000

Figure 1. Perceptions of how Illinois Compares to Other States in Income Tax Rates by Respondents’ Family Incomes

Chart showing Perceptions of how Illinois Compares to Other States in Income<br />
Tax Rates by Respondents' Family Incomes

annually thought that Illinois falls in the bottom third; 17 percent of those with family incomes exceeding $100,000 did. The proportion claiming that Illinois is in the top 17 at income tax falls steadily as incomes rise from $30,000 to over $100,000. The pattern is quite strong.

In sum, it would seem that perceptions of tax rates, though perhaps skewed towards exaggeration, might be more accurate than popular wisdom would claim. No one likes taxes, but it does not seem to be the case that most people simply assume that their own taxes must always be higher than those of everyone else. Not all of our respondents were willing to hazard a guess about how Illinois compares to the rest of the states at gasoline taxes, but those with an opinion were mostly correct. The income tax responses, however, disprove the (plausible) conjecture that “highest” is the natural response to all such tax questions. Over-estimation is not quite so dramatic. At every income level, our respondents did over-estimate the Illinois burden. But the fact that perceived burden falls with own incomes hints that these perceptions are nonetheless grounded in reality, in the sense that they are probably based on personal experience. The responses can even be regarded as fairly sophisticated against the baseline, widespread view that the public simply doesn’t understand taxation or know any of the details of the undeniably complicated American tax system.