Illinois Tax Increases Cause $51 Million Decrease to Wisconsin Budget

The Legislative Fiscal Bureau (LFB) released a memo on July 11 stating that tax increases in Illinois’s recently enacted budget would have a $51 million adverse impact on Wisconsin’s 2017-19 state budget.

Overriding Gov. Bruce Rauner’s veto on July 6, the Illinois legislature enacted a budget that increases taxes by almost $5 billion in 2017-18. The increase includes several changes to Illinois’ individual income tax. According to LFB, these changes include raising the Illinois state income tax from 3.75 percent to 4.95 percent effective July 1, immediately adjusting the states withholding tables, limiting the standard exemption allowance to filers with adjusted gross incomes below certain thresholds ($250,000 for all filers and $500,000 for married-joint filers), capping the Illinois property tax credit also based on the income thresholds, increasing the state’s earned income tax credit rate and changes to the state tax credits for education professionals.

Since 1973, Wisconsin and Illinois have had an income tax reciprocity agreement that allows residents of each state who earn income in the other state to file and pay income taxes only in their state of residence. Because more Wisconsin residents work and earn income in Illinois than vice versa, Wisconsin makes an annual reciprocity payment to Illinois each year based on the estimated difference in lost income tax revenue for Illinois.

Gov. Scott Walker’s budget assumed Wisconsin’s tax reciprocity payment to Illinois will be $66 million in 2017-18 and $68 million in 2018-19. LFB recalculated these numbers considering the recent Illinois’ income tax increases and updated income tax collections from both states and projected that the tax reciprocity payment over the biennium will be $21 million higher than the payment assumed in Walker’s budget.

In addition to the adjustments to the annual reciprocity payment, the Illinois tax changes lead Wisconsin residents to claim larger credits for taxes paid to other states. LFB estimated this outcome lowers Wisconsin income tax collections by $13 million in 2017-18 and $17 million in 2018-19. Altogether, the reciprocity payment and loss from tax credits are estimated to lower the general fund by $51 million in the 2017-19 biennium.

The $51 million negative adjustment only exacerbates the state’s budget issues. Wisconsin legislators remain at an impasse over the budget for the new biennium, which began on July 1.

Reacting to the LFB memo, Joint Finance Committee co-chairs Sen. Alberta Darling (R-River Hills) and Rep. John Nygren (R-Marinette) said in a statement that while the upcoming budget will address the loss of revenue, they expect Wisconsin to make up for the decrease in revenue as Illinois businesses move to Wisconsin to avoid higher taxes.