Candice Horbacz
A proposed constitutional amendment in Illinois, House Joint Resolution Constitutional Amendment (HJRCA) 21, faces strong opposition from tax policy experts who warn it could severely damage the state’s economic competitiveness and exacerbate its ongoing population exodus. Katherine Loughead, Director of State Tax Projects at the Tax Foundation, delivered written testimony to all members of the Illinois House of Representatives on April 23, 2026, outlining significant concerns regarding the measure. This testimony followed HJRCA 21’s advancement out of the House Revenue & Finance Committee on April 21st, notably without a public hearing, a procedural move that has drawn scrutiny from transparency advocates and those seeking thorough legislative debate.
The Tax Foundation, a nonprofit, nonpartisan tax policy research organization, clarifies its role as providing objective information on tax policy issues rather than taking official positions on specific legislation. However, Loughead’s testimony meticulously details the potential economic fallout should HJRCA 21 be adopted, challenging the premise and anticipated benefits of the proposed tax increase. The core of HJRCA 21 is a plan to amend the Illinois Constitution, introducing a 3 percentage point surtax on individual income exceeding $1 million. The revenue generated from this surtax would be constitutionally earmarked, with half dedicated to property tax relief and the other half distributed to school districts on a per-pupil basis. While these goals—property tax reduction and increased school funding—are broadly appealing to the public, the Tax Foundation argues that the chosen mechanism would inflict lasting harm on Illinois’s economic landscape, impacting not just high-income earners but also small businesses, employees, and consumers across all income brackets.
The Legislative Path and Context of HJRCA 21
The swift progression of HJRCA 21 through the House Revenue & Finance Committee on April 21st, 2026, without a formal hearing, has added a layer of controversy to the proposed constitutional amendment. Typically, legislative proposals of such significant constitutional impact undergo rigorous public hearings, allowing for broad stakeholder input, expert testimony, and public discourse. The absence of such a hearing for HJRCA 21, as highlighted in the Tax Foundation’s note, suggests a streamlined, potentially expedited, legislative process. This procedural decision has raised questions among various groups, including business associations, taxpayer advocacy organizations, and even some legislators, about the thoroughness of the review given the profound implications of altering the state’s fundamental tax structure.
The proposal to amend the Illinois Constitution is a particularly weighty matter, as constitutional changes are inherently more difficult to reverse than statutory laws. This means that if HJRCA 21 were to pass both legislative chambers and be approved by voters, its economic effects, positive or negative, would be deeply entrenched, making future adjustments challenging. The very nature of a constitutional amendment solidifies a policy, removing it from the annual legislative budgeting and review process to a significant extent, and thus demanding the most careful consideration. This is not the first time Illinois has grappled with the idea of moving away from its flat income tax. In 2020, voters rejected a proposed constitutional amendment that would have replaced the state’s flat income tax with a graduated income tax structure. The current HJRCA 21, while not a full conversion to a graduated system, introduces a surtax that effectively creates a tiered structure for higher earners, revisiting similar debates about tax fairness and economic impact.
Transforming Illinois’s Tax Landscape: A Shift to Higher Rates
Under the provisions of HJRCA 21, Illinois’s top marginal individual income tax rate would undergo a substantial transformation, shifting from its current flat rate of 4.95 percent to a significantly less competitive graduated structure with a top rate of 7.95 percent. This 3-percentage-point increase would dramatically alter Illinois’s standing among U.S. states. Currently, Illinois’s 4.95 percent flat rate, while not the lowest, has been considered relatively competitive, often sitting around the national median. However, if HJRCA 21 were enacted, Illinois would climb from having the 25th-highest top individual income tax rate in the country to the 12th-highest. Within the Midwest region, this would position Illinois with the second-highest top marginal rate, surpassed only by Minnesota.
The impact extends even further for pass-through businesses, which include partnerships, S corporations, and trusts. These entities are subject to Illinois’s 1.5 percent Personal Property Replacement Tax (PPRT) in addition to the individual income tax. For them, the top marginal rate would surge to 9.45 percent (7.95% + 1.5%). This places their tax burden nearly on par with Illinois’s corporate income tax rate, which stands at 9.5 percent when combined with the PPRT. Nationally, this proposed rate would rank Illinois’s top marginal rate for pass-through businesses as the ninth-highest in the country, a significant disincentive for entrepreneurial activity and investment.
This move comes at a time when the national trend among states is decidedly toward lower income tax rates. Since 2020, 23 states have actively reduced their top marginal state individual income tax rates, driving the national median top marginal rate down from 5.4 percent in 2020 to 4.7 percent in 2026. In stark contrast, only five states and the District of Columbia have implemented increases to their top marginal rates on ordinary income during the same period. This widening gulf means that states like Illinois, which have not reduced their rates, are already falling behind. A constitutional amendment like HJRCA 21 would cement Illinois’s status as a high-income-tax state, making it exceedingly difficult to unwind the potential negative economic effects in the future, even if future policymakers recognize the need for change.
The Deterioration of Illinois’s Competitive Edge
Illinois’s current single-rate, or flat, individual income tax structure has long been considered a key competitive advantage. Its simplicity and predictability offer benefits to both the state and its taxpayers. Moving to a graduated-rate structure, even one with a surtax on only the highest earners, would dismantle this advantage. The economic literature consistently points to negative effects of progressive tax structures on upward mobility and wage growth. Research by William M. Gentry and R. Glenn Hubbard, for example, found a statistically significant relationship between decreases in the progressivity of individual income tax structures and the probability of workers transitioning to better jobs within a year. Their study also highlighted a statistically significant negative relationship between tax progressivity and the real growth rate of wages.
Proponents of graduated-rate income tax systems often argue they are a means to address income inequality and ensure the wealthy contribute their "fair share." However, academic research, such as that by Martin Feldstein and Marian V. Wrobel, indicates that higher marginal rates tend to lead to a relocation of capital and high earners to more favorable tax environments. This phenomenon, often referred to as "tax flight," not only undercuts the state’s efforts to increase revenue from high earners but also reduces the overall economic activity and, consequently, the income of lower-income individuals who remain in the state. Reduced opportunities and a less competitive economic environment create a ripple effect, harming the entire state’s population.
The Alarming Trend of Outmigration and Regional Disparity
Illinois is already grappling with a severe and persistent outmigration problem, a trend that HJRCA 21 is projected to exacerbate. The newly released IRS migration data for 2022-2023 painted a grim picture, showing Illinois with the fourth-highest rate of population loss to other states, trailing only New York, Alaska, California, and Hawaii. This ongoing exodus represents a significant loss of human capital, taxpayers, and economic dynamism for the state. The primary destinations for Illinois residents seeking new homes are states with more favorable tax climates and robust economic opportunities, including Florida, Indiana, Texas, and Wisconsin. Notably, Florida and Texas are among the nine U.S. states that do not levy an individual income tax, while Indiana and Wisconsin are neighboring states that have actively pursued tax reform to enhance their competitiveness.
The contrast with Illinois’s immediate neighbors is particularly stark. Four of Illinois’s five bordering states—Indiana, Iowa, Kentucky, and Missouri—have distinguished themselves as leaders in income tax reform and relief over the past five years. Their income tax rates are on a clear downward trajectory, signaling a concerted effort to attract and retain residents and businesses. For instance, Iowa’s flat rate is scheduled to drop to a highly competitive 3.5 percent next year. Indiana’s flat rate is set to decline even further, to 2.9 percent. Kentucky has implemented legislation that leverages future revenue growth to phase out its single-rate individual income tax entirely over time. This November, Missouri voters may even have the opportunity to decide on a constitutional amendment that would use future revenue growth to gradually eliminate the state’s individual income tax.
If Illinois proceeds with increasing its income tax rate while its neighbors are actively and repeatedly reducing theirs, the state can realistically expect an acceleration of residents and businesses leaving. This divergence in tax policy creates a powerful incentive for individuals and companies to relocate, further depleting Illinois’s tax base and workforce. The competitive landscape for talent and capital is fierce, and states that offer lower tax burdens and more stable fiscal environments will inevitably draw resources away from those that do not.
The Hidden Burden on Small Businesses and Employees
While HJRCA 21 is often framed as a tax solely on the "rich" or the wealthiest individuals, a closer examination reveals that a significant portion of the tax burden would fall squarely on Illinois’s small businesses. According to the U.S. Small Business Administration, Illinois boasts approximately 1.4 million small businesses, which collectively employ about 44 percent of the state’s workforce. The vast majority of these small businesses operate as "pass-through" entities—such as S corporations, LLCs, partnerships, and sole proprietorships. This means their business income is not taxed at the corporate level but rather "passes through" to the owners, who then report it on their individual income tax returns.
IRS data provides compelling evidence of this connection: nearly 73 percent of Illinois individual income tax filers with more than $1 million in adjusted gross income (AGI) derived income from pass-through business ownership. Furthermore, 65 percent of all pass-through business income in Illinois was earned by filers with $1 million or more in AGI. These statistics underscore that a surtax on individual income exceeding $1 million would, to a substantial degree, function as a surtax on the profits of small businesses.
While pass-through businesses would bear the legal incidence of this surtax, the economic incidence—the actual burden of the tax—would largely be shifted. Much of this burden would ultimately be borne by consumers in the form of higher prices for goods and services, and by employees through lower wages and fewer job opportunities. This economic reality means that the surtax would lead to fewer economic opportunities for Illinoisians across all income levels, including many who would not directly owe the surtax themselves. A study by Karel Mertens and Jose Olea demonstrated a negative relationship between changes in income tax rates and the wages of both higher-income and lower-income workers. Their research indicated that a cut to the average marginal tax rate applied only to the top 1 percent of the income distribution would increase real GDP, reduce unemployment, and positively affect the incomes of those not in the top 1 percent. Conversely, this suggests that increases to the top marginal rate, even if affecting only the top 1 percent, would likely have detrimental effects on GDP growth, unemployment rates, and overall wages, impacting the broader economic well-being of the state.
Earmarking Revenue: A Flawed Approach to Property Tax Relief and School Funding
Beyond the method of raising revenue, HJRCA 21 also dictates how the new funds would be used, specifying that 50 percent would be allocated to property tax relief and the remaining 50 percent distributed to school districts on a per-pupil basis. While these are laudable goals, the Tax Foundation argues that financing them through a narrow-based, highly volatile surtax would generate several harmful unintended consequences, ultimately undermining the very stability and local control that residents value.
In Illinois, as in most states, local property taxes serve as the primary funding source for K-12 schools, supplemented by state and federal revenue. This structure fosters a direct link between local taxes paid and local benefits received, empowering residents with a strong sense of control over their tax dollars and how they are utilized for local services, particularly education. Shifting a greater portion of school district funding responsibilities to the state level, and particularly from a broad-based, stable tax like the property tax to a narrow-based, volatile surtax, would weaken this crucial tie. This erosion of local control could diminish local taxpayers’ oversight of school funding and other critical local decisions.
Furthermore, there is no guarantee that the property tax relief mandated by the constitutional amendment would translate into a net tax cut for lower- and middle-income residents. Local governments retain the authority to set their own budgets. Without explicit, stringent limitations within the constitutional language, there is nothing to prevent local governments from simply raising their overall budgets once a state subsidy for a portion of local property taxes is put in place, effectively negating the intended relief.
A critical flaw in the proposal lies in its reliance on an inherently unstable revenue source to fund essential services. Property taxes are widely recognized as one of the most stable sources of revenue for local governments, providing a predictable base for long-term planning. In contrast, income tax revenue, particularly from a surtax on high earners whose business and investment incomes fluctuate substantially with economic cycles, is notoriously volatile. Increasing reliance on such a narrow-based, highly variable tax to reduce dependence on a broad-based, stable tax like the property tax would inject significant instability into school districts’ revenue streams. This volatility would make the school district budgeting process considerably more challenging, potentially leading to unpredictable funding levels for education.
The Tax Foundation’s testimony emphasizes that decisions regarding property tax reductions are best made at the local level, during the local budgeting process, where residents can directly influence how their communities allocate resources. Similarly, if Illinois residents wish to increase funding for schools, the property tax remains the most appropriate and stable vehicle for achieving that goal. Attempting to simultaneously increase school funding and reduce property taxes by shifting the burden onto a small subset of higher earners and business owners is an approach that lacks fiscal cohesion and risks placing Illinois in an even more precarious economic position. The cautionary tale of New Jersey serves as a potent example: that state adopted its individual income tax in 1976, partly with the aim of reducing reliance on property taxes. Today, however, New Jersey is known for having some of the highest and most burdensome income and property taxes in the country, demonstrating that a state-level income tax does not automatically guarantee local property tax relief.
A Critical Juncture for Illinois’s Economic Future
Illinois stands at a critical juncture regarding its fiscal policy and economic trajectory. The state’s 4.95 percent single-rate individual income tax has been one of the few "bright spots" in a tax code that often struggles with competitiveness. HJRCA 21, if passed, would dismantle this advantage, making individuals and businesses worse off and likely intensifying the state’s challenges.
Instead of pursuing policies that increase tax burdens and disincentivize economic activity, policymakers are urged to consider pro-growth tax reforms. Such reforms could include further streamlining the tax code, reducing overall tax burdens to align with competitive states, and fostering an environment conducive to business growth and job creation. By adopting policies that attract more businesses and individuals to Illinois, the state could generate additional revenue through a broader, more robust tax base, rather than attempting to extract more from a shrinking one. The choice before Illinois lawmakers and, ultimately, its voters, is whether to embrace a path of increased taxation and diminished competitiveness or to pivot towards reforms that promise long-term economic vitality and a more prosperous future for all Illinoisians.
