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 In November 2020, Illinoisans will get an extremely rare
opportunity to change the Illinois Constitution as well as decide how they are
taxed.
Those things will be wrapped up in a ballot question about adopting a
progressive state income tax, where rates rise with income.
Should voters approve the referendum, Gov. J.B. Pritzker has already signed into
law the new rate structure that would take effect. It is a $3.4 billion tax hike
on individual taxpayers and businesses in Illinois.
But during debates about the amendment, several lawmakers suggested the
progressive income tax proposal didn’t go far enough in raising rates. One
suggested tax rates in excess of 10%. Pritzker has made more than $10 billion in
spending promises from the tax, even though he only projects $3.4 billion in
revenue from it.
These calls for even higher rates – and state politicians’ habit of breaking tax
promises – have fueled fears that the “fair tax” amendment is simply a blank
check for Springfield, courtesy of middle-class taxpayers.
Here’s what Illinoisans need to know about the progressive income tax proposal.
How does the progressive tax vote work?
A question asking whether voters approve of the progressive income tax measure
will appear on November 2020 ballots. The exact wording of the question has yet
to be determined. The requirements for passage are that the amendment will need
either the approval of 60% of voters voting on the question, or greater than 50%
approval from all voters who cast ballots in the election.
Here’s a hypothetical example to illustrate how the thresholds work:
If voters approve, how will my taxes change?
If voters approve the constitutional amendment on the 2020
ballot, and new income tax rates aren’t passed by the Illinois General Assembly
before then, Illinoisans will face income tax rates ranging from 4.75% to 7.99%
starting Jan. 1, 2021.
Under Pritzker’s proposed progressive tax system, a married
couple in Illinois with two kids earning the $79,168 median annual income and
paying the average property tax bill of $4,157 would see $195 in total tax
relief, according to the Pritzker administration’s online “fair tax calculator.”
But if that same family uses two cars on a regular basis, they will see a $300
tax hike under Pritzker’s capital plan, which doubled the state’s gas tax on
July 1, and will hike annual vehicle registration fees starting in January 2020.
Taken together, Pritzker’s plan would charge the typical family $105 more in
taxes than they currently pay. And that’s before considering any increases in
Illinois’ second-highest in the nation property taxes.
What about property taxes?
Property taxes are the largest state or local tax Illinoisans pay, and currently
they pay the second-highest rates in the nation. Despite rhetoric from the
governor that a progressive income tax will provide property tax relief,
Pritzker has signed no legislation to make this a reality.
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Instead, a Property Tax Relief Task Force has been
commissioned to identify potential paths toward property tax relief.
The task force’s findings are due by the end of 2019, and barring
any recommendation for pension reform, will likely recommend
increased state funding for local governments, potentially leading
to higher state income taxes. And, again, Pritzker has promised more
than $10 billion in new spending from a tax he projects will yield
$3.4 billion more.
Will the progressive income tax fix state finances?
A progressive income tax will not solve Illinois’ fiscal issues.
Despite several massive income tax hikes in recent years, Illinois
has failed to pass a balanced budget since 2001, and the new budget
is out of balance by up to $1.3 billion. At the same time, pension
costs are projected to consume more than 27% of the state’s expected
general revenues despite deteriorating fiscal conditions,
significantly handcuffing spending on services.
Since 2000, state spending on pensions has grown by almost 680%
while spending on employee health insurance has grown more than
240%. Without reforms to these massively rising cost drivers, growth
in spending will far outpace growth in revenue.
What have other states done?
In the past two decades, no other state has switched from a flat
income tax structure to a progressive income tax structure. In fact,
three states have gone in the opposite direction, scrapping
progressive income taxes in favor of a flat tax system. Utah in
2008, North Carolina in 2013 and Kentucky in 2018 all made the
switch to a flat income tax structure and cut taxpayers’ rates.
Additionally, Colorado voters in 2018 rejected a statewide ballot
amendment that would have swapped the state’s flat income tax for
progressive rates.
Most states that established progressive income tax structures did
so in the early 20th century. The last state to switch from a flat
income tax to a progressive income tax was Connecticut in 1996. The
small tax cut quickly turned into a 13% tax hike on the middle
class, did nothing to solve the state’s finances or balance their
budgets, was unable to stymie growth in property taxes and
contributed to a 47% increase in the state’s poverty rate.
Will Illinoisans get a voice on other constitutional amendments?
As things stand right now, Illinoisans will not be permitted to vote
on other constitutional amendments such as fair maps or term limits,
both of which are more popular than the progressive income tax.
Despite the widespread popularity of these initiatives, no measures
to place these issues on ballots in 2020 were passed this year.
Pritzker supported fair maps during his campaign but has largely
gone silent on the issue during his first year in office. Meanwhile,
the governor publicly opposed term limits on lawmakers.
Summary
Although this plan is being sold as a way to shore up state
finances, pay down debt and increase funding for services, it will
fail to match those claims. Without addressing the structural
spending problems that created the highest overall tax burden in the
nation, a progressive income tax system would only be a bridge to
higher income taxes for the middle class.
Judging by how quickly Pritzker’s “fair tax” promises have receded
and spending promises have grown, it has become clear to taxpayers
the ease with which income tax rates could rise under the governor’s
plan. Instead, Pritzker and the General Assembly should follow a
responsible roadmap to tax relief and restored fiscal health through
pension reform and spending restraint.
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