The Illinois Senate has passed related measures that would replace the state’s flat-rate personal income tax with a progressive tax structure if voters approve a change in the state’s constitution.
The Illinois Senate passed its version of a progressive income tax package on strictly partisan lines, including a proposed constitutional amendment that would remove the requirement for a flat income tax structure from the state’s constitution, on May 1.
The proposed amendment will be placed on the ballot in the 2020 general election if it is passed by the House of Representatives. Democrats hold a majority in both houses of the General Assembly.
If the constitutional amendment is approved by voters, the Senate tax bill would freeze local school property taxes temporarily and abolish the state’s death tax.
New Rates, Tax Hikes
Illinois currently imposes a 4.95 percent tax on all personal income, and a 7 percent tax on corporate income. Since 1970, the year after Illinois adopted an income tax, the state’s Constitution has prohibited a graduated income tax.
The Senate bill would raise the top personal income tax rate to 7.99 percent, create separate rates for single and joint filers, and raise the corporate tax rate to 7.99 percent.
A progressive tax proposal from Gov. J. B. Pritzker failed to garner enough support on procedural votes for consideration in the Illinois House of Representatives. Pritzker’s plan would raise the top personal income tax rate to 9.75 percent. The House could take up the Senate plan and amend it.
In addition, a draft of Pritzker’s capital improvement plan includes doubling the state’s gasoline tax, the State Journal-Register reported May 17.
‘Worse for the Economy’
A progressive income tax would be bad for the state’s economy, says Orphe Divounguy, chief economist of the Illinois Policy Institute.
“Dollar for dollar, progressive income taxes are worse for the economy than flat income taxes,” Divounguy said. “Progressive income taxes have a worse effect on the economy because they lower the return on new investments and deter investment in human capital—education and skills—that boost individuals’ productivity and earning potential.”
Progressive income taxes deter investment more than equivalent flat taxes do, Divounguy says.
“States that have progressive income taxes see slower job creation and slower wage growth than states with flat income taxes,” Divounguy said. “Even those who may receive a tax cut from a progressive income tax tend to be worse off due to the effect that the progressive tax has on individuals and businesses around them.”
Progressive ‘Trojan Horse’
Both the Pritzker proposal and the plan passed by the Senate would reduce tax rates slightly on low- and middle-income taxpayers, but those rates could be raised in the future by the General Assembly. Additional tax hikes may well follow, says Adam Schuster, research director at the Illinois Policy Institute.
“A progressive income tax is nothing but a Trojan Horse for more middle-class tax hikes,” Schuster said.
“If the flat tax protection is removed from the Illinois Constitution, it will become easier for politicians to hike taxes on everyone by playing different groups of people against each other,” said Schuster. “While the progressive income tax is being sold as a magic bullet, it’s nothing but a blank check for politicians.”
Population Fleeing High Taxes
Illinois has been losing population to nearby states because of its high-tax policies, says Edward Hudgins, research director for The Heartland Institute, which publishes Budget & Tax News.
“Illinois has plenty of neighboring states with lower taxes” Hudgins said. “Illinois also has seen its loss of population grow worse for five years straight as overburdened taxpayers flee, taking their income with them.”
Since the Great Recession, nearby states have effectively controlled spending and balanced their budgets without tax increases, says Divounguy.
“The top marginal tax rate has been lowered in all of Illinois’ neighbor states, and Illinois is the only one of her peers who is considering raising income taxes,” Divounguy said.
“It is also unsurprising that these states are all adding jobs at a faster rate than the Land of Lincoln and we consistently see more residents fleeing to these states from Illinois than vice versa,” Divounguy said.
Owen Macaulay ([email protected]) writes from Hillsdale, Michigan.
Matthew Glans and Lennie Jarratt, “Research & Commentary: Progressive Income Tax Would Doom Illinois,” The Heartland Institute, May 7, 2019: https://heartland.org/publications-resources/publications/research–commentary-progressive-income-tax-would-doom-illinois