This report provides background information and evidence-based answers in response to questions posed by an Illinois legislator. The questions are: (1) Can you describe the income distribution in Illinois and how this has evolved over the recent past? (2) Can you project out the income distribution in Illinois for the next five years and project personal income tax revenue with: (a) Illinois’ current personal income tax system? (b) a graduated rate personal income tax system comparable to other Midwestern states (i.e. Wisconsin, Minnesota, Iowa or Missouri)? (3) What personal income tax revenue would Illinois’ economy generate if it adopted the personal income tax structure of Wisconsin, Minnesota, Iowa or Missouri? (4) How are tax burdens distributed in the current tax system and how would they be different under alternative tax systems in the question above? In order to answer questions (1) and (2) our report provides an analysis of the current and historical income distributions of Illinois taxpayers along with forecasts of how the income distribution will change over the next five years. There is a concern among some legislators that an increase in income inequality will have a negative impact on the Illinois tax system. We first reviewed the historical evolution in the Illinois income distribution using data from the Internal Revenue Service, and from peer-reviewed academic research using the same data source. We demonstrate that since the late 1970s, income inequality has been rising in Illinois and that the increase has mirrored the increase at the national level. We then use standard economic forecasting techniques to forecast the share of income received by households in the top and bottom income categories. We find that households in the top income category are expected to receive a greater share of income over the next five years but that the pace of the increase will be smaller than in recent history. Eventually, the share is projected to peak and start coming down. At the bottom end of the income distribution, the share of income is predicted to continue to fall but at a slower pace than in the past, reach a trough and eventually begin to go up. Overall, this suggests that the changes in the income distribution on average over the next five years are not expected to be great, implying very little effect on the Illinois tax system.
"We find that households in the top income category are expected to receive a greater share of income over the next five years but that the pace of the increase will be smaller than in recent history. Eventually, the share is projected to peak and start coming down."