Why raising taxes is like raising prices


The state income tax rate varies a lot across the US, from as little as 0% up to 10% or more. I live in Illinois, which has historically had one of the lowest personal income tax rates: 3%. However, the new governor insists they need to raise the income tax rate to 4.5% in order to make ends meet. Given how tough the economic situation is right now, I can’t imagine a worse move to make.

When you think about it, the personal income tax is a big part of the cost of living differences between different states. If you view each state as a product, the income tax is part of the price you pay for that product. So, raising taxes is like raising prices. All else equal, higher prices typically lead to lower sales. For Illinois, this means fewer people will move here, and more current residents will move away.

I haven’t heard a peep from the governor or even the news media about how higher taxes might reduce the number of actual taxpayers in Illinois. Surely, some people will seek refuge in lower-tax states. In turn, the added revenue that the state promised from higher income taxes will fall way short of projections — leaving the remaining residents paying more taxes just to maintain the old revenue levels. Even worse, the budget shortfall that led to the tax increase will still be there, meaning that the government drove people away, increased the burden on those who stayed, and didn’t make a dent in the original problem.