By Andrew Adams
In the upcoming election, Illinois voters will consider the “Fair Tax” amendment to the Illinois Constitution, a potentially crucial reform to the Illinois state government’s taxing powers. The question at the center of it all: does Illinois want a progressive or graduated income tax, meaning people who make more have a higher tax rate, or the current flat income tax, where all ostensibly pay the same rate, with the rich having more access to tax loopholes?
The ballot will include a brief explanation of the amendment, which states that it merely “gives the State the ability to impose higher tax rates on those with higher income levels and lower income tax rates on those with middle or lower income levels.” Even though the economic harm wreaked by the coronavirus (COVID-19) pandemic originally was not a factor in proponents crafting the amendment, that issue is affecting the debate.
It is no secret that Illinois has faced budget deficits in the best of times, and the shortfalls have worsened due to the pandemic. According to data from the Urban Institute’s State and Local Finance Initiative, Illinois had a 23% revenue decrease this spring compared to 2019; the U.S. overall had a 30% decrease. The State passed a bill in May borrowing $5 billion from the Federal Reserve to help. This debt comes on top of the $3.4 billion deficit for last year’s budget and $8.5 billion in unpaid bills. Passing the graduated income tax amendment would increase State revenue by about $1.4 billion during this budget year and $3.4 billion over the following 12 months.
The amendment would put into effect immediately new tax rates passed by the house in 2019. According to Lara Sisselman, a spokesperson with the pro-amendment campaign Vote Yes for Fairness, the change would increase taxes only on those making more than $250,000 per year.
Although opponents claim the amendment would not fix COVID related shortfalls or the State’s financial situation as a whole, Sisselman said those claims ignore the core issue, which involves justice. “COVID has changed a lot, but a lot of things stayed the same,” she said, adding “our tax system was unfair before COVID.”
Flat tax regressive
The unfairness to which she referred stems from Illinois’s current flat tax structure, which is “regressive,” meaning it taxes poorer citizens more than richer citizens.
To simplify a complex economic argument, paying 5% in taxes when one makes $20,000 per year means that one is much closer to not making rent, but investing 5% in taxes when one make $20,000,000 per year means that one may not be able to invest quite as much into the stock market.
Adam Schuster with the conservative think tank Illinois Policy Institute (IPI) argued the progressive tax will do more to harm the Illinois economy than help, saying that, even in the best of times, this tax structure would drive away business and investment. Particularly amid “arguably the worst economic crisis in 90 years,” the progressive tax would make the situation even worse, according to Schuster, who alleged, “for economists across the spectrum, this is the one thing they agree one: that you shouldn’t raise taxes right after a recession.”
Schuster wants to turn Illinois away from tax reform right now toward addressing the more than $135 billion of unfunded pension liability. “If there was a crash, it would slide to insolvency,” he said. His group, IPI, argues that reforming that system would preserve the flat tax rate, which business owners allegedly like, while still balancing the budget.
Schuster believes the amendment represents an “enhanced taxing authority” and would be “granting that to Mike Madigan’s Springfield.” When asked if investigation into alleged corruption by Speaker Madigan affects the campaign for a progressive income tax, Schuster said “I think it likely will and probably should.”
Sisselman objects to this line of argument, which she said is common from amendment opponents. “The legislature has the power to raise taxes tomorrow if they want,” she said. Sisselman added that “the Fair Tax is not some new radical system,” and noted that the majority of U.S. states and the Federal government already employ a graduated income tax. In opposition, Schuster argues that, in 18 of those states, the middle class is included in the highest tax rate. Amendment proponents argue that would not be the case under the proposed Illinois system.
Fair Tax opponents also argue that, if enacted, people and businesses will move to neighboring states. Yet those states already have much higher top marginal tax rates than Illinois.
What about racial justice?
The amendment question comes at a time when society is trying to reconcile issues of racial injustice at all levels. The nonpartisan think tank Institute on Taxation and Economic Policy (ITEP) studied effects of the past 20 years of Illinois’s flat tax. Their report on the subject says the Illinois flat tax “amounts to a tax subsidy for the wealthiest Illinoisans that compounds income inequality and racial wealth gaps.”
The report goes on to explain that black and Hispanic Illinois residents making less than $250,000 paid $4 billion more in taxes over the 20-year period than they otherwise would have. In a progressive tax system, these taxes “would otherwise have been paid by the wealthiest Illinoisans, 84% of whom are white, non-Hispanic.”
In effect, the ITEP study found that a flat tax subsidizes rich Illinoisans (who are mostly white) at the expense of the poorest Illinoisans (who are mostly black and brown).
“Illinois has one of the most regressive taxes in the nation,” ITEP noted.
The push for a progressive tax has its roots in 2013, when a downstate state representative, Naomi Jakobsson (D-103rd 2003-15), first proposed a bill on the subject. Seven years later, the issue is coming to a head in this election.
The already complex progressive tax question becomes further complicated in a state operating under a 20-year budget deficit, investigating alleged corruption, and dealing with economic effects of the coronavirus pandemic.
As the ballot says, “You are asked to decide whether the proposed amendment should become a part of the Illinois Constitution.” Voters will decide how Illinois will tax residents in the future.
The Office of the Governor has a web page with a Fair Tax calculator showing how 97% of tax-payers will save money. Type “Fair Tax Calculator” in a search engine to reach the page.
Reach IPI at https://www.illinoispolicy.org/ or (217) 528-8800. For ITEP, log on to itep.org or call (202) 299-1066. Log on to urban.org for the Urban Institute or call (202) 833-7200. Vote Yes for Fairness is at voteyesforfairness.com or email email@example.com.