* OK, this is gonna get a little complicated, but stay with me here. From the Illinois Policy Institute…
Pritzker’s [graduated income tax] plan assumes Illinois will see average annual income growth of 3.61 percent. His administration claims this “conservative” estimate is both consistent with the state’s recent performance and accounts for a one-year stagnation in income growth to account for a slowing economy. But Pritzker is wrong on both counts.
According to the IRS, the average annual growth rate of Illinois’ adjusted gross income over the past five years of available data has been 3.37 percent, meaning the administration fails to correctly account for the past. The governor also alleges that a one-year stagnation of income growth in his assumption is “conservative” and accounts for an economic slowdown. But Illinois’ total income has not only stagnated, but declined in two out of the past four years on record.
* First of all, Pritzker’s office says they’re using net income for their five-year projection, while the IPI is using adjusted gross income. What’s the dif? From the governor’s office…
Net Income vs. AGI
We used net income because this is the taxable base upon which the tax rate is applied. Federal AGI is only a part of the picture, and is insufficient to create a realistic projection. When individuals file income taxes in Illinois, the state modifies the Federal AGI and then applies its own exemptions and deductions to come to the net income value.
* And the governor’s office looked at compounded annual growth instead of just simple growth. Team Pritzker…
The advantage of using a compound annual growth rate (CAGR) versus a simple annual average growth rate is that it provides a more realistic measure of growth. CAGR smooths year-to-year volatility, providing a more accurate way to—in the case of investments—measure actual fund performance over a given period of time. We need a 5-year forecast of incomes, because our most recent available data is for the 2016 tax year and the year the fair tax would take effect is 2021. Because we’re relying on a 5-year forecast, it’s far more important to know the likely values of income at the point in time five years in the future (2021), not what is happening in any given year between 2016 and 2021.
A CAGR is the compound average of a single year of growth. The annualized figure takes into account that we used the CAGR for 4 years of growth, and no growth for the fifth year [to reflect an expected national economic downturn]. So, the annualized value is effective 4/5ths of the 5 year GAGR.
* Now, click here to see the governor’s chart. My own impression when I first read the IPI’s report was that the group was looking at growth in all income levels, but I was more curious about people who earn higher incomes because they’re gonna get hit with the higher rates. From the governor’s office…
The growth in upper income brackets in Illinois is dramatically outpacing growth in lower income brackets.
That certainly makes sense and was what I expected.
* According to the governor’s office, the five-year 2011-2015 compounded annual growth rate for Illinoisans making $50,001-$100,000 was 0 percent. The same growth rate for Illinoisans making $25,001-$50,000 was 1 percent. The governor’s projected five-year growth (2016-2021), including a year of a national slowdown, is 0 percent for both. It’s -1 percent for incomes under $25K.
But the 2011-2015 growth rate for people making between $101K and $500K was 5 percent and it was 7 percent for those making over $500K. Those are projected to be 4 percent and 6 percent, respectively, for the 2016-2021 forecast.
Higher tax rates kick in at $250K.
…Adding… From the Illinois Policy Institute…
1) They used the preliminary 2016 income number from IDOR when a final number is available. The final number is lower by $3 billion, which maybe explains why they didn’t use it. This is artificially inflated, meaning the one-pager is artificially inflated too.
2) The numbers they gave you don’t match the total 2016 income number they released initially in the one-pager. The reason is that the one-pager added non-Illinois-resident filer income to the total (a highly volatile revenue source). Doing this makes their taxable income estimate rosier in 2021. Recall that the 97% tax cut claim is based on the one-pager.
In other words, they took growth in a number that doesn’t include an income source and applied it to a number that does include that income source (roughly $31 billion in 2016). They are flying by the seat of their pants here.
This also means they’re including 560,000 non-Illinois-resident returns in their 97% tax cut talking point.
3) Despite these inaccuracies, taking the info from the one-pager — 15.22% total growth from 2016-2021 — we backed out what the 4-year annual growth rate was. We use AGI because this reflects actual changes in income whereas net income can reflect changes to the state tax code. Predicting based on net income means you have to estimate size of deductions, etc. We checked IDOR data on net income and that still doesn’t reflect Pritzker’s assumed growth on the one-pager.
4) Economic growth should not be expected to increase at the tail-end of an economic expansion, even if their numbers were legit. They say it’s exactly the same for four years and then in one year it doesn’t grow. That’s irresponsible.
The one-pager referenced above is here.