TERRE HAUTE -- Low-earning residents of Indiana and Illinois pay a greater share of state and local taxes than those in all other Midwestern states, and those in most states nationally, according to a new study by a non-partisan think tank.
The study by the Washington, D.C.-based Institute on Taxation and Economic Policy found Illinois has the eighth-least equitable tax system in the nation while Indiana has the 12th-least equitable.
Illinoisans in the lowest 20 percent of income pay 14.4 percent of their income in state and local taxes while Hoosiers in that income category contribute 12.8 percent.
In both states, the share of taxes is considerably more than all other income groups. Indiana residents in the top 20 percent of income pay 8.4 percent or less in taxes while Illinoisans in that bracket pay no more than 11 percent.
The Indiana Institute for Working Families, a program of the Indiana Community Action Association, called attention to the study in a news release.
“The wealthiest Hoosiers have benefited from our growing national economy. It’s not unreasonable to ask the highest income residents and corporations to pay their fair share of state and local taxes,” Andrew Bradley, senior policy analyst for the institute, said in the release.
When combined with lower wages than neighboring states, lndiana’s regressive tax structure fuels increased inequality and denies working Hoosier families the same economic opportunities of previous generations, Bradley said.
“This is entirely about having a flat income tax rate and having that rate decline (slightly),” said Robert Guell, economics professor at Indiana State University.
Because the property tax is a flat rate and higher income people spend a lower proportion of their income on housing, the property tax is somewhat regressive, Guell said.
“Similarly, because the rich spend less of their income than do others, the sales tax will be somewhat regressive. Same thing with gas taxes,” he said.
Guell said there are two policies that would change the statistics: a bigger income tax exemption – it’s currently $1,000 per person – and a progressive rate structure.
“Indiana will never pass a progressive rate structure,” he said, but a higher personal exemption would reduce taxes on low earners.
There is support in Illinois for a more progressive structure via a graduated income tax.
A September survey by the Center for State Policy and Leadership at the University of Illinois-Springfield and NPR Illinois found 57 percent of likely voters favor such a change, but there is a partisan split.
More than two-thirds of Democrats and 56 percent of independents support it but only 41 percent of Republicans.
Low-income Indiana residents pay 7.1 percent of their income toward sales and excise taxes, compared with 3 percent or less for those in the highest 20 percent of income. In Illinois, the figures are 6.8 percent vs. 2.6 percent or less.
Both states have a flat-rate income tax, but Indiana also has local income taxes.
The state sales tax rate in Indiana is 7 percent while the Illinois rate is 6.25 percent, but local sales taxes make for a combined rate topping 10 percent in Chicago and reaching 9 percent or more in many other cities, including Danville and Champaign. Rates are often higher on restaurant meals.
Indiana has no local sales taxes, except for food and beverage taxes in Vigo County and 28 other locations, including Cloverdale and Rockville.
The national institute’s study, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States” found Minnesota has the most equitable tax system in the Midwest.
California gets the honors nationally while Washington state was found to have the least equitable system.