Beginning next year, Illinois residents who commute to Indiana for their jobs will pay higher income taxes.
That’s because Illinois tax officials this week officially canceled a 27-year-old income tax reciprocity agreement that allowed cross-state commuters to pay income taxes in the state where they live, not in the state they work. The move, first threatened last month, was announced Thursday.
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The income tax in Illinois is 3 percent, while Indiana’s is 3.4 percent.
Although Illinois officials failed to reach a compromise with Indiana, they did reach one with Wisconsin–worth an additional $5.5 million to Illinois. That agreement, which must be approved by the Wisconsin legislature, will allow residents who drive across the Wisconsin-Illinois border to pay income taxes where they live.
Even though tax laws say income is taxable in the state where it is earned, agreements among the three states allowed residents to pay their bills to the state in which they live.
In past years, the receipts about balanced out.
But things have changed recently. These days, far more Indiana and Wisconsin residents work in Illinois than vice versa.
Eight months ago, Illinois tax officials approached counterparts in Wisconsin and Indiana to propose a plan in which those states would give a portion of their tax receipts to Illinois each year.
But while Indiana officials agree they send more workers to Illinois each day, they question whether the Illinois Department of Revenue had the right figures.
Illinois State Revenue Director Ken Zehnder wanted Indiana officials to turn over $10 million until the exact amount of taxes owed could be figured. Indiana officials refused to hand over the money, saying they had no idea how much they really owed.
Though some state taxpayers will lose out with the cancelation of the agreement, the state wins. Because more Indiana residents cross into Illinois to go to work, the state will pick up an added $22 million, said Mike Klemens, spokesman with the Illinois Department of Revenue.
Under the Wisconsin agreement, Illinois will receive $8.25 million in 1999. By 2000, a study will be completed to determine the precise amount for reimbursement.