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 Senate Democrats on May 1 approved Gov. J.B. Pritzker’s prized
progressive tax constitutional amendment and a new income tax rate structure
that would take effect should voters approve the amendment on the 2020 ballot.
Senate Joint Resolution Constitutional Amendment 1 passed on a straight party
line vote: 40-19. SJRCA 1 would eliminate the state’s flat income tax
protection, empower lawmakers to pass additional income taxes on the same dollar
earned, and allow for the nation’s highest tax on business income. The amendment
now heads to the House, where the amendment will require 71 votes to send a
progressive tax question to Illinoisans on the 2020 ballot.
Three additional bills composing Senate Democrats’ progressive tax proposal also
passed without Republican support.
Though the plan differs in some ways from Pritzker’s original proposal, the
overall effect would be the same: a tax hike that would hurt small businesses,
drag down economic growth, fail to close the budget deficit and serve as a
bridge to higher taxes for the middle class.
What’s in the new progressive income tax proposal?
1) New income tax rates
The Senate passed three companion bills to the progressive tax amendment. First
is the income tax rate structure, Senate Bill 687. SB 687 passed on a 36-22
vote, with all Republican senators voting “no.” They were joined by Democrat
state Sens. Jennifer Bertino-Tarrant, D-Plainfield; Tom Cullerton, D-Villa Park;
and Suzy Glowiak, D-Western Springs. Democratic state Sen. Rachelle Crowe did
not vote. The bill is the first of Pritzker’s term to include potential rates
for a progressive income tax.
While Pritzker has been campaigning for months on his own proposal, the rates
and brackets passed out of the Senate are different from the governor’s.
Pritzker’s proposal levied a 7.95% flat rate on the highest income bracket while
the plan passed out of the Senate features a 7.99% flat rate on the highest
income bracket. That top bracket also now kicks in at a lower level for single
filers: $750,000 instead of $1 million.
The state’s corporate income tax rate would also be bumped up to 7.99% from 7%.
Pritzker’s plan hiked the corporate income tax to 7.95%.
Senate Democrats explained the changes as an attempt to rid
Pritzker’s proposal of the widely criticized marriage penalty, which would
subject joint filers to higher income tax rates than they would face if they
were single filers. But the Senate plan also fails to eliminate the marriage
penalty.
Because there were no changes to tax brackets below $250,000, the penalty still
exists for those who would see a tax cut – provided the plan doesn’t change
again. Married couples would receive less of a tax break than they otherwise
would if they were single.
For those who would face a tax increase, the marriage penalty still hasn’t been
fully eliminated. While the single filer brackets have been altered slightly,
married filers would still face the possibility of higher taxes under this
proposal than they would if they were single.
One of the most frequently stated reasons for enacting a progressive income tax
is the need to close the anticipated budget shortfall, currently pegged at $3.2
billion due to further increases in discretionary spending. But the plan
currently moving through the General Assembly would fall $175 million short of
this goal, according to the Senate Democrats’ own numbers.
The plan’s shortfall is likely much larger due to irresponsible growth
assumptions and faulty math.
Not only does the plan fall short of closing the budget deficit, it also means
that there won’t be revenue to pay for additional spending priorities, like
pensions, that Pritzker and others claim the progressive income tax can tackle.
Furthermore, the current budget deficit projection is likely understated because
it doesn’t account for a new AFSCME contract, the costs of the minimum wage
increase or additional pension costs.
And that’s not the only bad math at play.
Senate Democrats allege the income tax rates they passed rake in an additional
$3.325 billion in net income tax revenue (not including the estate tax repeal) –
$75 million less than the governor claimed his rates generated. Both of those
revenue estimates likely rely on the same faulty, contradicting math, which
independent organizations such as the Civic Federation have been unable to
replicate.
Previous analysis revealed the governor’s estimates were off by as much as $2
billion, likely meaning the Senate revenue estimates are off by even more.
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The reason these revenue estimates cannot be
replicated is because they make a litany of errors. Most notably,
the estimates rely on the assumption that income growth will
actually accelerate in the coming years. This is irresponsible given
the national economy is currently in the 11th year of an economic
expansion, with organizations like S&P Global Ratings anticipating a
slowdown in economic growth – and criticizing the governor’s revenue
projections. The majority of business economists anticipate a
recession by the time the progressive income tax would take effect
in Illinois.
Faulty revenue estimates ensure one thing: further tax hikes will be
coming when revenues fall short.
2) Pretend property tax freeze
If passed, Senate Bill 690 would also take effect should voters
approve the graduated income tax amendment in 2020. Lawmakers are
selling this bill as a property tax freeze – but it would do little
to nothing to address Illinoisans’ extraordinarily high property tax
bills.
First, the bill only applies to school districts. While it’s true
that school districts make up the majority of residents’ property
tax bills, there are still more than 6,000 other local taxing bodies
that would be able to raise property taxes under this proposal.
Furthermore, the bill still allows school districts plenty of
loopholes through which they can hike property taxes without voter
approval.
If the state fails to meet the funding requirements of “mandated
categorical” spending or the evidence-based funding formula, then
school district property taxes would still be allowed to rise. The
state has failed to meet mandated categorical funding for a decade,
meaning property tax bills are likely to rise statewide. The freeze
also exempts property tax hikes to make debt and pension payments –
two of the largest drivers of rising property tax bills in Illinois.
While most school district pension costs are funded by the state,
there have been recent proposals for these costs to be paid by local
school districts. Furthermore, because these growing pension costs
are funded at the state level, pension spending could crowd out
other types of state school funding that could lead to school
districts being exempt from the property tax freeze.
3) Estate tax repeal
Repealing Illinois’ “death tax” is the final element of the Senate
Democrats’ proposal, and would also take effect were voters to
approve the progressive income tax constitutional amendment. Senate
Bill 689 would repeal the Illinois estate tax, which brings in
around $300 million annually. Senate President John Cullerton
admitted the estate tax is driving wealthy residents out of the
state, and hopes the repeal could reverse that trend.
Unfortunately, even if the estate tax is repealed, it could easily
be reinstated. In fact, state lawmakers did exactly that in 2011.
A federal tax change effectively eliminated Illinois’ estate tax in
2010, and it was not scheduled to re-emerge until 2013. But Illinois
lawmakers promptly reinstated the tax in January 2011. The estate
tax is one of the easiest taxes to raise politically because it
affects a relatively small number of constituents – mostly wealthy
estates or large family farms.
Since the progressive tax plan falls well short of bringing in
lawmakers’ desired revenue, a bait-and-switch on the estate tax
could be especially appealing.
House lawmakers should reject this proposal
The Senate progressive income tax proposal is a bridge to higher
taxes. The plan and the claims surrounding it have already changed
several times since the governor unveiled his rates two months ago.
Further, Senate Democrats have already stated that it is unlikely
these will be the final rates and brackets and that the entire
proposal is subject to change.
With no assurances about the proposal, the graduated income tax is
essentially a blank check for a governor who plans to spend up to
$19 billion more per year. That kind of spending could raise taxes
on the typical family by $3,500 per year, and would be devastating
to the state’s economy.
Illinois House members concerned about their constituents – many of
whom already reject Pritzker’s plan, according to polling data –
would be wise to reject this proposal.
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