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 On March 7, Illinois Gov. J.B. Pritzker’s office released an
income tax plan that proposes changing the state’s flat income tax system to
graduated, or “progressive,” rates. But the only state in 30 years to make that
switch shows why Illinois should stick with a flat income tax.
Connecticut is the only state to enact a progressive income tax system during a
time that two states scrapped their progressive taxes. Connecticut leaders
argued that putting a heavier burden on “the rich” would lower taxes on the
middle class, jog the economy and reduce poverty. Those are Pritzker’s arguments
today.
What were the results? Middle-class tax hikes, jobs loss and more poverty.
A new Illinois Policy Institute analysis of Connecticut’s progressive tax
experience indicates the system worsened the very problems Pritzker is arguing
the tax will solve in Illinois. Far from a magic pill, a progressive tax system
would progressively worsen the state’s fiscal health. Here are four lessons
Illinois lawmakers should take from Connecticut’s progressive tax failure:
1) Middle class income tax rates spiked by 13 percent
As with Pritzker’s progressive tax pitch, the promise of a middle-class tax cut
was a key selling point for advocates in Connecticut. But since the state
adopted its progressive system in 1996, typical Connecticut households have seen
their income and property taxes spike.
Since 1999, income tax rates on the median Connecticut
household have risen by more than 13 percent. And while Pritzker argues a “fair
tax” system would temper Illinoisans’ sky-high property tax burden, that wasn’t
true in Connecticut. Residents’ property tax bills climbed by more than 35
percent.
Connecticut’s poor fiscal health mirrors Illinois’. The progressive tax has
failed to fix it, with Connecticut running budget deficits for 12 of the past 15
years. Despite persistent tax hikes, Connecticut holds more debt per capita than
almost any other state.
2) Poverty soared under the progressive tax
Progressive tax proponents champion the measure as a tool to elevate vulnerable
residents and produce more equitable economic outcomes. In Connecticut, outcomes
were very different than intentions.
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Connecticut is a historically wealthy state, but
more residents fell below the poverty line after it adopted the
progressive tax. At the same time, poverty rates were falling
nationwide. From 1980 to 1991, before Connected
enacted its progressive tax, the state’s poverty rate was just 5.5
percent. That rate jumped to 8.1 percent during the decade following
the progressive income tax. In other words, 12,000 more Connecticut
residents dropped below the poverty line when the state imposed a
flat tax in 1991 and then 64,000 more fell into poverty after the
progressive tax began in 1996.
3) Connecticut shed 362,000 jobs
Why did more Connecticut residents fall into poverty under a
progressive income tax system? Fewer jobs is one answer.
Connecticut residents paid no income tax until 1991, when the state
first adopted a flat tax model. The state’s workforce took a hit
immediately, shedding 233,000 jobs. That number swelled to 362,000
in the years after 1996, when the state changed its income tax
system from flat to progressive.
What’s worse, high-paying jobs were the biggest loss after the
state’s progressive tax switch. Those are jobs that allow
lower-income residents to climb the socio-economic ladder. With
these opportunities either destroyed or never created following the
progressive tax, the state’s most vulnerable were less upwardly
mobile.
4) Connecticut’s economy lost more than $10 billion
Job opportunities thin when investment declines. And Connecticut’s
experiment with its income tax system ultimately cost the state $10
billion in investment. Connecticut’s economy took an
immediate hit after introducing its flat income tax in 1991,
initially shedding more than $4 billion. Switching to a progressive
system 1996 made matters much worse, costing the state an additional
$6 billion.
While Pritzker has exalted the progressive tax as a way to revive
Illinois’ slouching economy, Connecticut’s experience is a warning:
Our state’s finances could slump even more.
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