January 11, 2011
How to Lose Jobs and
Alienate People
Proposed tax hikes would shrink
incomes and destroy jobs
Illinois families are struggling. Businesses face
Tax & Budget Brief
uncertainty. The economy remains stuck in
the doldrums. In the midst of this precarious
situation, Governor Pat Quinn is pushing a
state income tax increase that will result in a
$1,353 personal income hit for each Illinois
household or a loss of over 100,000 private
sector jobs.
Personal income is an important economic
measure of a state’s well-being. Higher levels of
personal income mean that a state’s residents
are able to buy more goods and services such as
homes, cars, education and healthcare. It is also
a very useful way to gauge the ability of a state’s
residents to pay taxes.
Fundamentally, personal income comes from
two sources: the private sector and the public
sector. The distinction between the two sectors
is important because only the private sector
creates new income. The public sector, in
contrast, can only redistribute income through
taxes and spending. More specifically, public
sector spending consists of personal current
transfer receipts (Medicare, Medicaid, Social
Security, etc.) and government employee
compensation (federal, state and local).
Illinois policymakers should be very concerned
about the clear evidence that public sector
spending “crowds out” the private sector (see
Methodology section for more details). Yet,
despite this evidence, Democratic state leaders
have suggested massive tax hikes that would
J. Scott Moody is a Senior Fellow for Budget and Tax Policy for the Illinois Policy Institute.
* This proposal also takes into consideration an increase of the corporate income tax rate to 5 percent from 4.8 percent.
significantly reduce the size of Illinois’s private
sector relative to the public sector.
One proposal is to raise the individual income
tax rate by 33 percent (to 4 percent from 3
percent), which would have raised an estimated
$2.8 billion in FY 2010.1 Another proposal
involves a more extensive tax increase, which
would raise both the corporate and individual
income tax rate to 5 percent (currently 4.8
percent and 3 percent, respectively).2 This
proposal would increase the individual income
tax rate by 66 percent and would have raised an
estimated $5.7 billion in FY 2010. This study
conservatively bases its analysis using these FY
2010 tax revenue estimates and a projection
of a corporate rate increase to five percent
(although very recent proposals might in fact raise the
corporate rate to 7 percent).
As a consequence of these tax hikes, Illinois
taxpayers would pay a steep price through
higher tax bills, lower incomes and fewer jobs.
Appendix A (page 4) shows the impact of these
tax proposals on the average Illinois household.
The most immediate impact is that the average
household will face an increase in their tax
bill of $596 under the 33 percent income
tax increase proposal or $1,205 under the 66
percent income tax increase proposal.*
However, even more troubling is the fact that
in the longer run there will be a much higher
economic cost to pay in either lower incomes
or fewer jobs. Overall, the Illinois economy
 Page 2 of 6
will suffer a drop in personal income over
the next 3 to 5 years of $6.5 billion under the
33 percent income tax increase plan or $13.2
billion under the 66 percent increase plan*—2.3
times greater than the tax increase itself. The
drop in personal income can manifest itself in
one of two ways—lower household income
for everyone or fewer jobs. Reality will lie
somewhere in between.
The tax 1. The economic cost of the 33 percent
proposals income tax increase plan over the next 3
to 5 years ranges from:
by both • $1,353 less personal income for all
Gov. Quinn households with no private sector
job loss, or no change in household
and Budget personal income but the loss of
107,684 private sector jobs.
Director
Vaught 2. The economic cost of the 66 percent
income tax increase plan* over the next 3
would be to 5 years ranges from:
• $2,734 less personal income for all
devastating households with no private sector
to Illinois’s job loss, or no change in household
personal income but the loss of
economy at a 217,519 private sector jobs.
time when the Table 1 also shows the economic cost by
recovery from county. Under both tax proposals, Lake County
has the highest tax increase and personal
the “Great income loss per household while Cook County
Recession” has the largest total job loss. On the other side
of the coin, under both tax proposals, Johnson
has been County has the lowest tax increase and personal
income loss per household while Pope County
extremely has the lowest total job loss.
tepid. In conclusion, the tax proposals by Democratic
state leaders would be devastating to Illinois’s
economy at a time when the recovery from the
“Great Recession” has been extremely tepid.
This study shows that the total economic cost
to the economy is 2.3 times larger than the tax
increase itself. Clearly, the better option is to
shelve tax increases and reduce government
spending, which would, in turn, expand the
private sector. The private sector could then get
back to work increasing incomes and creating
new jobs.
* This proposal also takes into consideration an increase of the corporate income tax rate to 5 percent from 4.8 percent.
Methodology
The economic loss estimates in this study are
derived from the significant positive correlation
between per household personal income with
the private sector share of personal income
for 2009 as shown in Appendix B (page 6). Put
simply, the bigger the private sector, then the
greater per household personal income.
States with larger private sectors will grow
faster over time than states with smaller private
sectors. When examining all the 48 lower
states, the analysis finds that, on average, a 1
percentage point decrease in the size of the
private sector yields a decrease in per household
income of approximately $2,601 for Illinois.
The 33 percent tax increase plan would shrink
the private sector by up to 0.52 percentage
points. That means, over the next 3 to 5 years,
the average household in Illinois would see
their income drop by up to $1,353 ($2,601
times 0.52 percentage points). The overall loss
in personal income would be up to $6.438
billion ($1,353 times 4,757,452 households).
The drop in personal income will hit Illinois
taxpayers by 1) reducing income for everyone
or 2) destroying jobs for a few. To represent this
range of possibilities, the lost personal income
is shown on a per household basis (lost personal
income divided by households) and on a per
job basis (lost personal income divided by the
average private sector compensation)—reality
will lie somewhere in-between. This analysis
estimates a reduction in the long-term growth
in the economy and does not necessarily mean
an elimination of existing household income or
jobs. It does mean that future pay increases and
job creation will be lower than they would be in
the absence of higher taxes and spending.
For an illustrative state-to-state comparison,
let’s examine two states that are virtually
identical in every way except for the size of the
private sector—New Hampshire and Maine.
In 2009, New Hampshire had the largest
private sector in the nation (75.7 percent)
and the 14th highest per household personal
income ($111,402), whereas Maine had only
the 41st largest private sector (63.6 percent)
and the 41st higher per household personal
 Page 3 of 6

income ($88,261). As such, New Hampshire’s

per household personal income is 26 percent
higher, or $23,141, thanks to a more vigorous
private sector.3

The personal income data is from the Bureau

of Economic Analysis (www.bea.gov), which
is adjusted into “per household” using data
from the Census Bureau (www.census.gov).
The economic loss estimates are made on a
statewide basis. The losses are allocated by
county based on their share of personal income
and private sector employment.

Since official tax proposals had not been

submitted as of this writing, there are no
official revenue estimates. Therefore, tax
estimates of the proposals were estimated by
linearly extrapolating the most current year’s
(FY 2010) tax collections. Since the economy
does not appear ready to resume strong
economic growth, no attempt was made to
project these tax estimates for future years.

Note this analysis assumes all new revenue

will be spent on government transfer receipts
(Medicaid) or government workforce
(employment and compensation). This is
reasonable since much of the budget gap is in
Medicaid (due to the end of federal stimulus
payments) and the underfunding of the pension
system.

Endnotes
1 Wilson, Doug, “Quinn says Tax Hike Plan
Honest, if not Popular, and will Preserve Schools,”
Quincy Herald Whig, August 19, 2010. http://www.
whig.com/story/news/Quinn-081910
2 Preston, Darrell, “Illinois Likely to Boost Taxes,
Budget Director Says,” Bloomberg Businessweek, July
28, 2010. http://www.businessweek.com/news/2010-
07-28/illinois-likely-to-boost-taxes-budget-director-says.
html
3 For a long-run comparative chart of New
Hampshire’s versus Maine’s economic performance,
see: http://nheconomics.org/2010/08/in-the-news-
august-27-2010/
 Page 4 of 6
Appendix A: Estimated Economic Loss Due to Proposed Tax Hikes

33 Percent Income Tax Increase Proposal 66 Percent Income Tax Increase Proposal*
Personal Personal
Area Tax Tax
Income Job Loss Income Job Loss
Increase per or Increase per or
Loss per Equivalent Loss per Equivalent
Household Household
Household Household
Illinois $596 $1,353 or 107,684 $1,205 $2,734 or 217,519
Adams $496 $1,126 or 630 $1,003 $2,275 or 1,273
Alexander $334 $757 or 33 $674 $1,529 or 66
Bond $434 $984 or 97 $876 $1,988 or 196
Boone $451 $1,022 or 312 $910 $2,065 or 631
Brown $351 $797 or 54 $710 $1,611 or 108
Bureau $511 $1,159 or 235 $1,031 $2,341 or 475
Calhoun $437 $991 or 21 $882 $2,002 or 43
Carroll $445 $1,011 or 96 $900 $2,042 or 194
Cass $439 $996 or 111 $887 $2,012 or 224
Champaign $471 $1,068 or 1,497 $951 $2,157 or 3,024
Christian $476 $1,081 or 227 $962 $2,184 or 459
Clark $448 $1,016 or 104 $904 $2,052 or 210
Clay $432 $980 or 111 $872 $1,980 or 224
Clinton $517 $1,172 or 247 $1,044 $2,368 or 500
Coles $425 $965 or 418 $859 $1,950 or 845
Cook $651 $1,478 or 48,773 $1,316 $2,986 or 98,521
Crawford $469 $1,065 or 139 $948 $2,151 or 280
Cumberland $457 $1,038 or 62 $924 $2,097 or 124
DeKalb $427 $968 or 658 $862 $1,955 or 1,329
De Witt $498 $1,131 or 102 $1,006 $2,284 or 207
Douglas $508 $1,153 or 171 $1,026 $2,329 or 346
DuPage $774 $1,758 or 11,135 $1,564 $3,550 or 22,493
Edgar $450 $1,022 or 114 $910 $2,065 or 231
Edwards $422 $958 or 63 $852 $1,934 or 128
Effingham $483 $1,096 or 377 $976 $2,215 or 762
Fayette $371 $841 or 121 $748 $1,698 or 245
Ford $568 $1,289 or 104 $1,147 $2,604 or 211
Franklin $380 $862 or 199 $767 $1,741 or 402
Fulton $443 $1,006 or 165 $895 $2,032 or 332
Gallatin $425 $965 or 26 $859 $1,949 or 53
Greene $393 $893 or 60 $795 $1,804 or 120
Grundy $490 $1,111 or 319 $989 $2,244 or 645
Hamilton $417 $947 or 33 $842 $1,912 or 67
Hancock $471 $1,068 or 108 $950 $2,157 or 219
Hardin $332 $753 or 24 $670 $1,520 or 48
Henderson $451 $1,024 or 30 $912 $2,069 or 60
Henry $493 $1,118 or 286 $995 $2,259 or 578
Iroquois $497 $1,128 or 187 $1,004 $2,279 or 378
Jackson $423 $959 or 394 $853 $1,937 or 797
Jasper $443 $1,005 or 44 $894 $2,029 or 89
Jefferson $425 $964 or 354 $858 $1,946 or 716
Jersey $492 $1,116 or 112 $994 $2,255 or 227
Jo Daviess $558 $1,267 or 183 $1,128 $2,560 or 369
Johnson $301 $684 or 51 $609 $1,382 or 102
Kane $517 $1,174 or 3,912 $1,045 $2,371 or 7,901
Kankakee $441 $1,000 or 775 $891 $2,021 or 1,566
Kendall $507 $1,151 or 462 $1,025 $2,326 or 932
Knox $442 $1,003 or 375 $893 $2,026 or 757
Lake $782 $1,775 or 6,384 $1,580 $3,586 or 12,897

* This proposal also takes into consideration an increase of the corporate income tax rate to 5 percent from 4.8 percent.
 Page 5 of 6
33 Percent Income Tax Increase Proposal 66 Percent Income Tax Increase Proposal*
Personal Personal
Area Tax Tax
Income Job Loss Income Job Loss
Increase per or Increase per or
Loss per Equivalent Loss per Equivalent
Household Household
Household Household
LaSalle $481 $1,091 or 800 $971 $2,204 or 1,616
Lawrence $394 $895 or 83 $797 $1,808 or 167
Lee $455 $1,033 or 233 $919 $2,087 or 471
Livingston $562 $1,275 or 271 $1,135 $2,575 or 548
Logan $444 $1,009 or 173 $898 $2,037 or 349
McDonough $404 $916 or 184 $815 $1,850 or 372
McHenry $546 $1,239 or 1,855 $1,103 $2,503 or 3,746
McLean $545 $1,236 or 1,550 $1,100 $2,497 or 3,132
Macon $549 $1,245 or 980 $1,108 $2,516 or 1,979
Macoupin $461 $1,046 or 222 $931 $2,114 or 448
Madison $508 $1,152 or 1,804 $1,026 $2,327 or 3,643
Marion $425 $965 or 239 $859 $1,949 or 484
Marshall $530 $1,203 or 73 $1,071 $2,430 or 147
Mason $497 $1,128 or 65 $1,004 $2,279 or 131
Massac $407 $925 or 79 $823 $1,868 or 160
Menard $543 $1,233 or 51 $1,097 $2,490 or 104
Mercer $515 $1,169 or 64 $1,041 $2,362 or 129
Monroe $566 $1,284 or 188 $1,143 $2,593 or 380
Montgomery $416 $945 or 181 $841 $1,909 or 366
Morgan $447 $1,014 or 269 $903 $2,049 or 543
Moultrie $472 $1,072 or 88 $954 $2,166 or 177
Ogle $444 $1,007 or 348 $897 $2,035 or 702
Peoria $591 $1,341 or 1,878 $1,193 $2,708 or 3,793
Perry $333 $756 or 100 $673 $1,527 or 202
Piatt $607 $1,378 or 76 $1,226 $2,783 or 154
Pike $414 $939 or 80 $836 $1,896 or 162
Pope $375 $852 or 11 $758 $1,720 or 23
Pulaski $393 $892 or 28 $794 $1,801 or 56
Putnam $530 $1,202 or 40 $1,070 $2,427 or 81
Randolph $383 $869 or 182 $774 $1,756 or 367
Richland $413 $938 or 126 $835 $1,894 or 254
Rock Island $538 $1,221 or 1,320 $1,087 $2,466 or 2,667
St. Clair $497 $1,127 or 1,690 $1,003 $2,277 or 3,415
Saline $401 $911 or 168 $811 $1,839 or 339
Sangamon $557 $1,263 or 1,688 $1,124 $2,551 or 3,409
Schuyler $504 $1,144 or 38 $1,018 $2,311 or 76
Scott $445 $1,010 or 24 $899 $2,041 or 49
Shelby $449 $1,018 or 100 $906 $2,057 or 201
Stark $553 $1,255 or 25 $1,117 $2,535 or 51
Stephenson $506 $1,148 or 383 $1,022 $2,319 or 774
Tazewell $555 $1,261 or 1,140 $1,122 $2,546 or 2,303
Union $388 $880 or 84 $783 $1,777 or 169
Vermilion $428 $971 or 533 $864 $1,961 or 1,076
Wabash $432 $980 or 68 $872 $1,979 or 136
Warren $452 $1,025 or 114 $912 $2,070 or 231
Washington $483 $1,096 or 98 $975 $2,214 or 197
Wayne $438 $995 or 95 $885 $2,009 or 192
White $485 $1,100 or 102 $979 $2,223 or 207
Whiteside $468 $1,061 or 377 $945 $2,144 or 761
Will $543 $1,232 or 3,588 $1,096 $2,488 or 7,248
Williamson $435 $987 or 467 $879 $1,994 or 943
Winnebago $464 $1,053 or 2,527 $937 $2,127 or 5,104
Woodford $553 $1,255 or 238 $1,117 $2,536 or 481
Source: Illinois Policy Institute, see “Methodology Section” for details.
* This proposal also takes into consideration an increase of the corporate income tax rate to 5 percent from 4.8 percent.
 Page 6 of 6

Appendix B: Relationship Between Private Sector

Share and Per Household Personal Income

$150,000

$140,000

Per Household Personal Income

$130,000

$120,000

$110,000

IL
$100,000

$90,000

$80,000

$70,000

55%
60%
65%
70%
75%
80%

Private Sector Share of Personal Income

Source: U.S. Department of Commerce: Bureau of Economic Analysis, Census Bureau and Illinois Policy Institue. Excludes AK and HI.