The Illinois General Assembly is once again considering moving the state away from a flat tax system to a progressive tax system. Proponents say the new tax system, which they label the “fair tax,” will move the tax burden away from low- and middle-income taxpayers to higher-income households, who they argue are not paying their “fair share.” Currently, the Illinois Constitution requires a flat tax, so any change would require the approval of a constitutional amendment by three-fifths of the state legislature, and it would also have to be passed by a voter referendum. If the amendment were to pass, Illinois state Rep. Lou Lang (D-Skokie) has proposed creating four tax brackets: 3.5 percent, 3.75 percent, 8.75 percent, and 9.57 percent.
Progressive taxes are a form of income redistribution, with the taxes paid by higher-income earners used to cover government services for lower-income people. Supporters of the progressive tax argue this is both fair and an example of social justice, but these taxes violate democratic tax principles by placing an undue burden on certain groups of people. Even under a flat tax, those who earn higher incomes pay more in taxes, achieving the “social justice” progressive tax proponents claim to seek.
Tax revenues are more volatile under progressive tax systems than with flat taxes, making budgeting more difficult. Relying on a small percentage of higher-income taxpayers for a larger percentage of revenues generates revenue windfalls and spending free-for-alls during economic booms, followed by massive budget gaps during economic recessions.
Despite claims made by supporters of a progressive tax system, Illinois does not have a tax revenue problem. The state does, however, have a severe and dangerous spending problem. A recent study from the Pew Charitable Trusts found Illinois’ tax revenues have grown by almost 20 percent since just before the 2008 recession. Tax revenues have grown faster in Illinois than in any other state except North Dakota. Even when the tax reduction at the beginning of 2015 is taken into account, Illinois’ post-recession tax revenues exceed all states in the Midwest region.
John Tillman of the Illinois Policy Institute warns taxpayers there is no guarantee increasing taxes will help the state’s budget problems. “We know from Illinois’ own history that tax increases will not solve Illinois’ persistent financial problems. In 2011, Democrats enacted a tax increase that raised $31 billion in taxpayer dollars over five years. They claimed the cash infusion would help pay down the state’s backlog of bills and restore Illinois’ fiscal health. Instead, 90 cents out of every $1 from the tax increase went to pensions – a pension system these same Democrats refuse to reform.”
Progressive taxes also drive wealthy taxpayers out of the state, and their income, capital, and tax revenues go with them. If this tax were adopted, The Tax Foundation determined Illinois would fall from 23rd to 48th on their State Business Tax Climate Index. Illinois already has the 5th highest total tax burden, when calculated as a percentage of income. Imposing a progressive income tax would only increase the tax burden borne by every taxpayer, making Illinois one of the least attractive places in the United States to do business.
The fair tax is anything but fair: It increases taxes for most taxpayers, increases the burden on small businesses, and enables the rampant growth in spending that is already crippling the state. Illinois legislators should focus on making the state a more attractive place for businesses and workers by restraining spending, lowering taxes, and reducing unnecessary regulations. Illinois’ tax rates are steadily climbing higher than most states’, and increasing them any further risks greater harm to the state’s economic competitiveness.
The following articles examine progressive income taxes and the Illinois fair tax proposal.
State Rep. Lou Lang Proposes $2 Billion Tax Increase
https://www.illinoispolicy.org/press-releases/state-rep-lou-lang-proposes-2-billion-tax-increase/
The Illinois Policy Institute responds to Illinois state Rep. Lou Lang’s (D-Skokie) introduction of a bill that would increase taxes in Illinois by $1.9 billion. Lang wrote the bill in response to a proposed amendment to the Illinois Constitution that would switch the state from using a flat tax system to a progressive tax system.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Illinois Considers Further Income Tax Increases as Temporary Tax Nears Expiration
http://taxfoundation.org/article/illinois-considers-further-income-tax-increases-temporary-tax-nears-expiration
Lyman Stone of the Tax Foundation examines Illinois’ 2011 tax hikes and the proposed switch to a progressive tax system. Stone argues moving away from the current flat tax could have dire effects on the state’s economy: “Extending what was meant to be a temporary tax increase, or significantly increasing the state’s income tax still further, would sidestep these fundamental issues while worsening the state’s already shaky economic footing.”
Five Illinois “Fair Tax” Myths
http://www.illinoispolicy.org/five-illinois-fair-tax-myths/
The Illinois Policy Institute outlines five myths about the proposed progressive tax proposals for the state, touted by their supporters as the Fair Tax. The article outlines the possible negative consequences of a switch from the flat tax.
A Brief Guide to the Flat Tax
https://heartland.org/policy-documents/brief-guide-flat-tax
Everything you wanted to know about the flat tax is provided in this PolicyFax by Dan Mitchell of The Heritage Foundation. Mitchell says the flat tax eliminates special-interest favoritism and prevents taxpayers from finding tax loopholes by hiring an army of lawyers, accountants, and lobbyists.
Progressive Income Tax Money Grab Disguised as Tax Reform
http://illinoispolicy.org/policy_posts/progressive-income-tax-money-grab-disguised-as-tax-reform/
In this article from the Illinois Policy Institute, Ted Dabrowski dispels several myths underlying the progressive tax. Dabrowski argues a progressive income tax will mean higher taxes for middle-income Illinoisans and destroy needed jobs for poor and working families.
Tax Foundation: Progressive Income Tax would Destroy Illinois’ Businesses Climate
http://illinoispolicy.org/tax-foundation-progressive-income-tax-would-destroy-illinois-businesses-climate/#sthash.1iXoOH2L.dpuf
Benjamin VanMetre of the Illinois Policy Institute examines an analysis from the Tax Foundation of the proposal to dump Illinois’ fair, flat tax in favor of a progressive tax that would force people to pay higher taxes as their income increases: “The conclusion was unsurprising: a progressive income tax would deliver a devastating blow to Illinois’ already struggling business climate.” A Heartland Daily Podcast with Mr. VanMetre is available here.
Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
http://heartland.org/policy-documents/long-run-macroeconomic-impact-increasing-tax-rates-high-income-taxpayers-2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, National Federation of Independent Business, S Corporation Association, and United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.
Progressive Income Tax would Deliver Devastating Blow to Illinois’ Already-struggling Economy
http://www.illinoispolicy.org/progressive-income-tax-would-deliver-devastating-blow-to-illinois-already-struggling-economy/#sthash.vjLTRMpt.dpuf
Kristina Rasmussen of the Illinois Policy Institute argues against progressive tax proposals in Illinois and outlines several facts illustrating the negative effects of a progressive tax system.
The U.S. Tax System: Who Really Pays?
http://heartland.org/policy-documents/us-tax-system-who-really-pays
Writing for the Manhattan Institute, economist Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.
Does Progressive Taxation Make State Budgeting More Difficult?
http://neighborhoodeffects.mercatus.org/2011/05/27/does-progressive-taxation-make-state-budgeting-more-difficult/
Matt Mitchell discusses the effect of a progressive tax system on state budgeting in this Mercatus Center report. Mitchell notes states with a progressive tax system have found it increasingly difficult to forecast tax revenues and set budgets. “In sum: it appears that progressive taxation seems to be a recipe for rapid revenue growth when the economy is expanding (even tepidly). But it also seems to lead to larger budget gaps during recessions,” he writes.
The Inequity of the Progressive Income Tax
http://www.hoover.org/publications/policy-review/article/72291
Kip Hagopian of the Hoover Institution contends the most compelling argument against the use of the progressive income tax to redistribute income is that it is inequitable: “Under a progressive income tax, the welfare of one group in a society has been increased at the expense of the welfare of a different group.” Hagopian dismantles arguments for the progressive income tax and proposes a new doctrine of tax fairness.
The Effect of Progressive Tax Codes
http://heartland.org/policy-documents/effect-progressive-tax-codes
Bill Ahern of the Tax Foundation discusses the effect different kinds of progressive taxes can have on taxpayers and the economy.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
