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 Gov. J.B. Pritzker so far put $56.5 million of his own money
into convincing voters they should scrap Illinois’ constitutionally protected
flat income tax on Nov. 3. Most of that money will buy ads boosting what have
been the progressive tax backers’ most popular – and deceptive – spins.
Here are the top claims Illinoisans can expect to hear, and the realities they
should remember.
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. 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. They can go after retirees.
They can tax the same $1 multiple times. Division allows lawmakers to skirt
backlash from voters.
The flat tax encourages political accountability. Many of the politicians who
voted for the 2017 tax hike were either forced to retire or voted out of office.
In the 32 states with progressive income taxes, 18 of them subject middle-class
families to the highest tax rate. All of them tax retirees.
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 those states has not been shrinking.
Illinois imposes the nation’s third-greatest tax burden on those in the lowest
20% of wage earners, or about $1,800. The progressive tax would save the average
person in that group only $6 – while decreasing their job prospects.
Poverty rates skyrocketed after Connecticut enacted a progressive income tax,
and that was while poverty rates were falling in most other states. Connecticut
in 1996 was the last state to scrap its flat tax for progressive rates.
Not only is income inequality, measured by the Gini coefficient, higher in
states with progressive income taxes, those 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 when
the two are compared over the past decade.
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 – compared to other income groups – and
suffer the most from a lagging economy.
Claim 3: A graduated income tax hike won’t harm the state’s economy.
Reality: The vast body of peer-reviewed academic literature shows tax hikes and
progressive income taxes hurt the economy.
There are claims that the $3.7 billion “fair tax” increase will have no effect
on the economy, but there is significant consensus among academic experts that
tax hikes do harm the economy. More than that, economists and policy experts are
in near-unanimous agreement that the financial chaos created by COVID-19 is
exactly the wrong time for a new tax. As former President Barack Obama said,
“You don’t raise taxes in a recession.”
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 their growth. New studies are
consistently confirming these results.
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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.”
To say that tax hikes don’t harm the economy is
simply wrong. The governor’s $3.7 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 UC
Berkeley economist Emmanuel Saez agrees optimal income taxes should
be “progressive on average but not on the margin.” Illinois’ 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 receive $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
classrooms. Despite the syphoning of state education funds by
pensions, Illinois still spends more per pupil than every Midwestern
state except for North Dakota, but yields below average educational
outcomes. Bloated district-level administration is a major reason
why more dollars are not advancing students. Without structural
reforms, a progressive income tax will be a tax for pensions – not
for school funding.
Claim 5: The choice is simple, 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. Illinois can balance the budget and
fund services without higher taxes.
Illinoisans have been paying higher and higher taxes every year.
Meanwhile, the fiscal condition of the state has continued to sink
and the COVID-19 recession is pushing it deeper. New revenue can’t
fix a broken state system.
Illinois leaders should learn from past mistakes instead of
constantly presenting a false choice to lawmakers and residents. The
governor claims there are only three ways to close the state’s
daunting $4.6 billion deficit: a federal COVID-19 bailout, 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, Illinois Forward, could accomplish all three through
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 core services that provide value to
Illinois residents.
Illinois can build a new reality that draws new residents and heals
injuries sustained during COVID-19, but political leaders first need
to stop claiming they can tax their way to prosperity.
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