The recent gubernatorial debates have many deliberating the benefits, costs and political viability of a graduated income tax for the state of Illinois.
A little background.
SJRCA 1 would have amended the Illinois Constitution to allow the General Assembly to establish a gradual income tax. Currently, the Illinois Constitution states that “a tax on or measured by income shall be at a non-graduated rate” (Art. IX, Sec. 30). This means that Illinoisans’ income is taxed at the same rate no matter their economic circumstances. In effect, a teacher who may make $35,000 a year is taxed the same rate as a billionaire, like Bruce Rauner. This not only makes any sense, but is also poor economics.
First, the initiative will allow the State to raise additional revenue without the regressive burden of a flat tax. The challenges we face demand more revenue and greater government investment without generating continuing deficits. The notion that the state of Illinois – with a backlog of $15 billion in bills – can simply cut its way to prosperity is completely benin. A balanced approached with new revenue streams is required.
A regressive system unfairly burdens low and middle class families by taxing a larger portion of their disposable income while withholding revenue lost to help invest in key public goods. In Illinois, the bottom fifth of earners pay 13 percent of their income in state and local taxes, while the top 1 percent pays 4.6 percent, or about a third of what poor people pay. This puts tremendous economic and budgetary constraints on low and middle class families because they spend a larger portion of their earnings compared to the more affluent. Moreover, the state will have a better cushion to close the deficit and invest in public goods and services with the additional revenue gained.
Secondly, every neighboring state – with the exception of Indiana and Michigan – already implements a graduated income tax. Minnesota has four brackets with rates that range from 5.35% to 9.85%; Wisconsin has four brackets ranging from 4% to 7.65%; Kentucky has six brackets ranging from 2% to 6%; Ohio has nine brackets ranging from 0.495% to 4.997%; Iowa has nine brackets ranging from 0.36% to 8.98%; and Missouri has ten brackets ranging from 1.5% to 6%. Even then, Indiana allows counties to levy income taxes, so while there may be a statewide flat income tax, most people end up paying an additional income tax on top of state and federal government. While Michigan also implements a flat rate, its rate of 4.25% is higher than Illinois’ current rate of 3.75%.
While implementing a gradual income tax will yield many benefits, success ultimately rests on political viability. Changing from a flate to gradual tax rate would require amending the Illinois State Constitution, where such an amended would need to be approved by 3/5 of both houses of the General Assembly and then approved by the voters the next general election. Additionally, even if the initiative is approved on election day and the gradual rate is implemented, it would be a while until that tax revenue will start coming in. Nevertheless, adopting a gradual rate is long overdue and legislators should continue to pursue it. However, it cannot be the main solution to fixing the state’s fiscal woes.