Graduated Income Tax

Todd Maisch, front, president and CEO of the Illinois Chamber of Commerce, speaks against a proposed constitutional amendment that would allow the state to impose a graduated income tax. Sen. Don Harmon, lead sponsor of the measure in the Senate, listens during a meeting Wednesday of the Senate Executive Committee at the Capitol in Springfield. Also seated at the table is Mark Denzler, president and CEO of the Illinois Manufacturers Association, which also opposes the measure.

SPRINGFIELD — A constitutional amendment that would allow the state to adopt a graduated income tax is on its way to the full state Senate after clearing committee on party lines Wednesday.

The measure, SJRCA 1, would give the Legislature the authority to tax higher margins of income at higher rates. If three-fifths of each the Illinois House and Senate vote to put the question on the ballot, voters will decide in November 2020 if that authority is granted.

Senate sponsor Don Harmon, an Oak Park Democrat, said the amendment is necessary to bring tax fairness to the state, as the bottom 20 percent of Illinois earners pay 14 percent of their total income in taxes, while the top 1 percent of earners pay 7 percent of their income in taxes. Those numbers are contained in the “Terrible 10” report conducted by the Washington D.C.-based Institute on Taxation and Economic Policy, which has been characterized as left-leaning.

Currently, the state constitution mandates a flat tax of 4.95 percent on every penny of income. Under the proposal touted by Gov. J.B. Pritzker, only earners whose income exceeds $1 million would be taxed at a flat rate — 7.95 percent — on every penny of income.

For all other earners, different rates ranging from 4.75 percent to 7.85 percent would apply to different margins of income. Those making $250,000 or less — about 97 percent of taxpayers, according to the governor’s office — would pay less in taxes than they do currently. The proposal would increase the property tax credit by 20 percent and would include per-child tax credits up to $100.

While Harmon said he expects the Legislature to pass a specific proposal by the end of the legislative session, Republicans continued to question the likelihood of the rates remaining as they are in Pritzker’s proposal for any measure of time.

Senate Minority Leader Bill Brady, a Bloomington Republican, opposed the amendment at committee Wednesday. He said he believed it opened up the ability to “raise taxes even further” and “play games” with the tax code by removing language which states “there may be no more than one such tax imposed by the state.”

Todd Maisch of the Illinois Chamber of Commerce said this could allow the state to add “surcharges” or assessments on separate lines of income for taxpayers.

Harmon dismissed that argument, noting that language was in place only to prevent the Legislature from imposing a “synthesized graduated tax” by proposing multiple rates, and he said the amendment would give no greater taxing authority to the state than it already possesses when it comes to varying income sources.

Dale Righter, a Mattoon Republican, opposed the amendment as well.

“Over the last 20 years, the states that have graduated rate structures have lowered the threshold of income one must make in order to qualify for the highest marginal rate 23 times, and in 18 of those 23 times, that figure has dipped below $100,000.”

Harmon said it won’t be any easier to raise taxes under the new plan.

“In the 50 years or so that Illinois has had an income tax, how many times have we raised the income tax rates?” he asked. “You can count them on your fingers of one hand and not use all of them. It’s a difficult vote to take. That would be true with a fair tax or the current flat tax.”

The state’s income tax was enacted in 1969 at a 2.5 percent rate, and it jostled between that rate and 3 percent for the next 42 years. In 2011, it was temporarily raised to 5 percent for a four-year period, dropping back to 3.75 percent in 2015. The current 4.95 percent rate hit the books in 2017.

But Righter said tax hikes would be easier under a graduated tax, at least for high income earners, because “politicians are pretty good at class warfare” and could package the tax hikes as taxes on “people over there.”

Mark Denzler of the Illinois Manufacturer’s Association opposed the graduated tax as well, noting it will remove one of “the last positives” for business stability by getting rid of the flat tax.

He said the income tax would “create an unholy trifecta” in Illinois, consisting of the second-highest property taxes in the nation, the highest sales tax and a new, higher top graduated rate.

While the bill raises the corporate flat tax rate to 7.95 from 7 percent, Denzler said the actual top corporate rate will be 10.45 percent due to a corporate personal property replacement tax levied by the state.

Dave Lowitzki, a consultant representing SEIU Healthcare, Everthrive, Sargent Shriver Center on Poverty Law, the AIDS Foundation, the Chicago Coalition for the Homeless, and Heartland Alliance, pointed to the human toll of revenue shortfalls for programs the state has already committed to funding.

“We saw the state suffer for two years under a major budget crisis,” Lowitzki said. “Without a budget, social service agencies were forced to scale back or close their doors. We know part of that was politics, but the real reason the politics happened is because we didn’t have revenue.”

According to the nonprofit online political encyclopedia Ballotpedia, 37 states have higher per capita spending rates than Illinois. Harmon said the alternatives to a graduated tax were 15 percent spending cuts to all state departments, or a 20 percent increase to the current flat tax rate of 4.95 percent to a 6.95 percent rate.

But opponents, including Orphe Divounguy, chief economist of the nonprofit conservative think tank Illinois Policy Institute, said the state has a spending — not a revenue — problem. He said Pritzker’s estimates “don’t add up,” and in order to raise the revenue necessary to close budget gaps, the middle class would have to pay higher rates if further measures such as pension reform are not enacted.

“It’s not addressing the root causes of our state's problems. We know what the state’s problems are, they’re on the spending side, and no reforms have been introduced to deal with them,” Divounguy said.

But Deputy Governor Dan Hynes said specific legislative counterproposals from elected Republicans have not been brought to the governor.

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