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 The Illinois General Assembly may be on spring break, but Gov.
J.B. Pritzker and his allies are hard at work trying to whip up support to scrap
Illinois’ constitutionally protected flat income tax. Too bad those graduated
income tax proponents are using false claims to do it.
Here are some of the most popular, and deceptive, spins:
Claim 1: It is just as difficult to raise taxes under a progressive tax as it is
under a flat tax.
Reality: It is easier to raise taxes under a progressive income tax than it is
under a flat tax.
A flat tax makes it far harder for politicians to raise taxes. After the 2017
tax hike, many of the politicians who voted for it were either forced to retire
or voted out of office.
A progressive income tax allows politicians to divide and conquer. They can
segment Illinoisans into small income groups and increase taxes on each, one at
a time. They can hold taxes constant for the majority in any given year, while
gradually raising taxes on everyone – one group at a time. This allows lawmakers
to skirt backlash from voters
In the 32 states with progressive income taxes, 18 of them subject middle-class
families to the highest tax rate.
Claim 2: We can fix inequality with this “Fair Tax.”
Reality: Income inequality is higher in progressive tax states, and the gap
between rich and poor in these states has not been shrinking.
Not only is income inequality, measured by the Gini coefficient, higher in
states with progressive income taxes, but progressive income tax states haven’t
been any more effective at combatting rising inequality. The difference in
income inequality between progressive and non-progressive income tax states
remains unchanged compared with the past decade.
In Connecticut, the last state to enact a progressive income tax, poverty rates
skyrocketed after enacting the tax while they were falling in most other states.
Because Pritzker is unwilling to consider structural reforms to the state’s cost
drivers, the lowest income Illinoisans under his tax plan pay the greatest share
of their income in state and local taxes.
Claim 3: A graduated income tax hike won’t harm the state’s economy.
Reality: The vast body of peer-reviewed academic literature acknowledges the
negative effects tax hikes and progressive income taxes have on the economy.
While many organizations are claiming that the $3.4 billion tax increase will
have no effect on the economy, there is unanimous consensus among academic
experts that tax hikes harm the economy.
 Everyone from Nobel Prize winners such as Edward Prescott to former chairs of
the Council of Economic Advisors including Christina Romer in the Obama
Administration, the Director of the Congressional Budget Office Douglas Holtz-Eakin,
George W. Bush economic advisors Harvey Rosen and Greg Mankiw, whose textbooks
are the most widely used in macroeconomics, agree. They say higher taxes hurt
economic growth and that higher marginal tax rates reduce small business
employment, the wages of their employees and firm growth. New studies are
consistently confirming these results.
Even the left-leaning Tax Policy Center admits that in the long-run, “High
marginal tax rates can discourage work, saving, investment and innovation, while
specific tax preferences can affect the allocation of economic resources.” They
also state that in the short-run, “Tax cuts boost demand by increasing
disposable income and by encouraging businesses to hire and invest more. Tax
increases do the reverse.”
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To say that tax hikes don’t harm the economy is
simply wrong. The governor’s $3.4 billion tax hike will hurt the
economy.
There is also a broad consensus that the optimal income tax – i.e.
the one that hurts the economy the least – is a flat tax. Even
Emmanuel Saez, who endorses Elizabeth Warren, agrees optimal income
taxes should be “progressive on average but not on the margin.” Our
current flat tax accomplishes this goal because of the value of
exemptions and deductions for lower-income tax filers.
As if more proof were needed to show that people respond to tax
policy, Illinoisans need only look at the governor himself. Pritzker
is currently under federal investigation for removing the toilets
from his Gold Coast mansion in order to get $331,000 in property tax
breaks. The governor also has been widely criticized for utilizing
offshore trusts to avoid paying taxes on his multi-billion dollar
fortune.
Claim 4: We need this tax to pay for education – or else.
Reality: Despite billions in increased education funding each year,
most of these funds have been diverted from classrooms to pay for
pensions.
During the past 20 years, state education spending, adjusted for
inflation, has increased by $5.4 billion annually. However,
two-thirds of this increase has gone to pensions instead of to
classrooms. Despite the syphoning of state education funds by
pensions, Illinois still spends more per pupil than every Midwestern
state except for North Dakota. Illinois’ spending yields below
average educational outcomes. Without structural reforms, a
progressive income tax will be a tax for pensions, not for school
funding
Claim 5: The choice is simple, we either raise revenue through (1)
the “fair tax,” (2) a flat tax increase for everyone or (3) enact
spending cuts of 15% across the board.
Reality: This is a false choice. We can balance the budget and fund
services without paying higher taxes.
We have been paying higher and higher taxes every year. Meanwhile,
the fiscal condition of the state continues to deteriorate. New
revenue can’t fix the state’s structural flaws.
Illinois leaders should learn from past mistakes, but Pritzker
constantly presents a false choice to lawmakers and residents. The
governor claims there are only two ways to close the state’s
daunting $3 billion deficit: massive tax hikes or slashing core
government services such as education, public safety and social
services.
That’s not true. Another option exists: Illinois can make structural
spending reforms to the core cost drivers of its overspending,
protect essential services and reduce the tax burden on Illinois
residents at the same time. The Illinois Policy Institute’s
five-year plan, Budget Solutions 2020, could accomplish all three
with commonsense reforms that have received bipartisan support in
the past.
Structural spending reform would enable lawmakers to balance the
state budget immediately. In fewer than five years, they could
eliminate the state’s bill backlog and finance a deficit-neutral
income tax cut. Contrary to the governor’s claims, this can be
accomplished without cuts to services that provide value to Illinois
residents.
Illinois can build a new reality that draws new residents, but
political leaders first need to stop claiming they can tax their way
to prosperity.
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