Graduated income tax plan is front and center in Illinois capitol

The debate over whether scrapping Illinois' flat-rate requirement for the state income tax will cure its fiscal ills or simply open the floodgates to future tax hikes is now front and center at the state capitol.

A vote on sending the constitutional amendment to voters looms in the Senate for the cornerstone of Gov. J.B. Pritzker’s plan to stabilize state finances over the long term. The legislature's minority Republicans say the change would backfire on Illinois.

Dan Hynes
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The Senate Executive Committee advanced the bill last week on a party line vote of 12-5 to the full Senate, which is expected to vote on it soon after it returns from a two-week break on April 30. If it passes, it would head to the House. The committee received 1,500 comments in favor and 1,900 opposed.

Moving to a graduated tax would put the state in the ranks of the “vast majority of other states and the federal government,” is “long overdue” and will allow the state “to close our structural budget deficit and begin to tackle the problems that Illinois faces,” Sen. Don Harmon, D-Oak Park, said during the first legislative hearing that followed Pritzker’s announcement last week that the amendment had been introduced. Harmon is the lead sponsor of SB SJRCA0001.

A graduated tax would allow the state to “play games with our tax code” while the flat tax requirement is there protect middle income families, Senate minority leader Bill Brady, R-Bloomington, countered as he cast a "no" vote. “The concern that this opens the door” to future increases “is very, very alarming to” our caucus, he said.

Pritzker is banking on passage by his fellow Democrats, first in the Senate and then in the House, although not all Democrats are on board. A three-fifths supermajority is needed in each house to send the measure to voters on the November 2020 ballot. Democrats have the supermajority plus three in the House, and plus four in the Senate.

Pritzker’s so-called “bridge” budget relies on a mix of one-time and recurring revenues and a seven-year extension of the state’s pension funding schedule to erase a roughly $3 billion deficit looming in fiscal 2020.

The governor is trying to stave off further bond rating deterioration or higher borrowing costs by assuring rating agencies and investors that the graduated tax and $3.4 billion in new revenue that he believes would be generated by his proposed tax rate structure would solve long-term strains. They include a pension tab of $133.7 billion and $8 billion unpaid bill backlog.

Moody's Investors Service rates Illinois Baa3 and S&P Global Ratings assigns a BBB-minus rating, both with stable outlooks. Fitch Ratings assigns its BBB with a negative outlook.

The graduated tax plan is among a flurry of major policy and fiscal initiatives the first-year governor wants to get done in the final weeks of the session that closes at the end of May. As of June 1, a higher vote threshold is needed for legislation to take effect immediately.

Other key items include an operating budget and a major multi-year infrastructure program that could be used to entice reluctant Democrats who fear voter backlash to vote for the graduated tax. The legalization of recreational marijuana and implementation of sports betting are on tap too.

Pritzker promoted the graduated tax, which he has labeled a “fair tax,” during his successful campaign last November to unseat Bruce Rauner. In March, he released a proposed rate structure.

The constitutional amendment would not set tax rates, but the administration has said it won’t go to voters without first setting a rate structure.

Under the administration’s initial proposal the current individual rate of 4.95% would be replaced with rates that begin at 4.75% on the 27.2% of taxpayers with the lowest incomes of up to $10,000. The 58.9% of taxpayers with incomes up to $100,000 would pay 4.90%. The 11.1% of taxpayers in the next bracket up to $250,000 would pay 4.95%.

Those earning up to $500,000 would pay 7.75% on their bracket, those earning up to $1 million would pay 7.85%, and those making more than $1 million would top out 7.95%. The top three tiers represent about 2.8% of taxpayers. The brackets would apply to individual and joint filers.

The plan also offers a 20% increase in the current property tax credit taxpayers can claim on their returns and a new $100 child tax credit that can be claimed on a sliding scale based on income.

The corporate income tax rate would go 7.95% from 7%.

The amendment reads: “The General Assembly shall provide by law for the rate or rates of any tax on or measured by income imposed by the state. In any such tax imposed upon corporations the highest rate shall not exceed the highest rate imposed on individuals by more than a ratio of 8 to 5.”

It would replace current language that reads: “A tax on or measured by income shall be at a non-graduated rate. At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations. In any such tax imposed upon corporations the rate shall not exceed the rate imposed on individuals by more than a ratio of 8 to 5.”

Pritzker and his backers say a plan that raises taxes on just 3% of Illinois residents offers the best alternative among three options they see for stabilizing state finances. The other two involve either a 20% hike in the flat tax or a 15% cut in state services.

Illinois Senate Republican Leader Bill Brady in 2019

Representatives from labor and a homeless advocacy group testified in favor of the amendment. Chicago Mayor-elect Lori Lightfoot, who was at the state capital meeting with lawmakers during the week to talk about the city's fiscal and other challenges, has endorsed the change. Local governments stand to see an increase in their share of income taxes if more revenue is generated.

Republicans and several policy and trade groups, including the Illinois Manufacturers’ Association and the Illinois Chamber of Commerce, dug in during the hearing, expressing concerns about the impact on business when coupled with high property and sales taxes. They also questioned whether the change would pave the way for higher future increases. They say the change could also open the door to new forms of income taxes such as ones solely imposed on agricultural income.

“We know what the state’s problems are. They’re on the spending side and no reforms have been introduced in order to deal with them,” the Illinois Policy Institute’s chief economist, Orphe Divounguy, told lawmakers in opposition to the proposal.

GOP members questioned deputy governor Dan Hynes over whether the governor would commit to not reaching further into taxpayer pockets if the revenue projections fall short.

Hynes stressed that the governor believes the proposal would reform the tax system and “solve a budget crisis” and would be sufficient. He stopped short of offering a guarantee against future hikes.

The bill’s sponsor, Harmon, disagreed that moving to a graduated tax would make future hikes easier to pass. Any tax increase is hard and “it’s not going to be any different,” he said.

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