Illinois grapples with another round of difficult budget cuts, some lawmakers want to eliminate the state’s constitutional flat-rate income tax requirement, opening the door for what some experts call a more equitable and lucrative graduated income tax.
Illinois currently has a 5 percent individual income tax for all taxpayers, regardless of income. But a pair of similar bills in the Illinois Senate and House, filed by Sen. Kwame Raoul, D-Chicago, and Rep. Naomi Jakobsson, D-Urbana, would do away with the constitutional flat tax requirement that has been in place since the current state constitution took effect in 1970. The proposal would require a constitutional amendment.
It goes hand-in-hand with a recent report by the Chicago-based Center for Tax and Budget Accountability (CTBA), which calls Illinois’ flat-rate tax unfair, unsustainable and harmful to job growth.
The February report from CTBA, titled “The Case for Creating a Graduated Income Tax in Illinois,” says a graduated tax would be more equitable for low- to mid-income families, while also allowing the state to bring in more revenue from top earners.
The theory behind “progressive taxation” – another name for a graduated tax – is based on the fact that the income tax is only one of several taxes families pay; others include sales tax and excise taxes on items like gasoline, telephones and more. So while a flat income tax rate means all families pay the same percentage of income tax, the other taxes eat up a larger percentage of income for families who earn less.
Data from the report show the lowest 20 percent of earners making less than $18,000 annually pay an average of 13.7 percent of their income to various taxes. By comparison, the state’s highest one percent of earners – those making $500,000 or more annually – pay 5.3 percent on average toward various taxes. CTBA projects that the ideal graduated tax plan would net the state an extra $2.4 billion in revenue and reduce taxes for 94 percent of taxpayers.
The two bills differ slightly in how they deal with the constitutional requirement that the income tax on corporations not exceed eight-fifths of the individual income tax rate. Raoul’s bill would limit the corporate rate to eight-fifths of a weighted average for the individual rate, while Jakobsson’s bill would instead use the average of the highest and lowest individual rate.
The proposal has support from the American Federation of State, County and Municipal Employees (AFSCME) Council 31, the largest union representing state employees.
“Such a fair tax plan could prevent further harmful cuts to basic priorities like health care, education, public safety and jobs while easing the middle-class squeeze,” AFSCME says on its website.
But Todd Maisch, vice president of government affairs for the Illinois Chamber of Commerce, says a graduated tax would hurt small businesses – many of which pay income taxes as individuals rather than as corporations.
“The supporters of this are saying everyone should pay their fair share, but we passed ‘fair share’ a long time ago,” Maisch says, referring in part to Illinois’ January 2011 income tax increase. Illinois now has the third-highest corporate tax rate in the entire industrialized world once federal taxes are added to the state’s 9.5 percent corporate tax rate, Maisch said. That figure includes the 7 percent corporate income tax and the 2.5 percent personal property replacement tax on most businesses.
“To continue to tilt it (the income tax) puts more people in the wagon and fewer people pulling,” Maisch says.
Amendments to Illinois’ constitution require a three-fifths majority vote in both chambers of the General Assembly. Next, voters in the following general election must approve the amendment with either three-fifths of those voting on the question or a majority of those voting in the election.
Raoul says now is a prime time for his fellow lawmakers to address the issue because of the difficult cuts likely to be made to this year’s budget.
“We’re challenged about our revenue, and the decisions we’re going to be making are going to have a disproportionate impact on the portion of the population that would be helped by a progressive income tax,” Raoul says. “…This is going to be a year of very tough decisions, and we’re looking for ways to capture resources and reduce the tax burden on middle-class and low-income working families.”
Contact Patrick Yeagle at email@example.com.