How Illinois' income tax compares nationwide, and how a graduated tax could change it
Editor's note: This story is part of an ongoing series about proposed changes in the state income tax formula.
Illinois residents making $1.5 million a year pay less in income taxes than their counterparts in all but eight of the 41 states with such a tax.
But for people making $60,000 a year, it's a different story. In 24 of the states, those taxpayers pay less than in Illinois.
The ratios would shift if voters approve a graduated income tax in November 2020. A graduated tax formula being discussed in Springfield is intended to increase taxes on the rich, reduce taxes on lower- and middle-income taxpayers, and generate $3.4 billion in new revenue.
Supporters believe the proposed graduated income tax rates can be easily absorbed by those who will be hit hardest. The top tax rate, 7.99%, is reserved for single filers who claim more than $750,000 of income and couples claiming more than $1 million.
“It's being done in a very rational way,” said Ralph Martire, executive director of the bipartisan Center for Tax and Budget Accountability. “That top rate kicks in at a much higher level than almost everywhere else in the country.”
In the state rankings, under the graduated tax proposal:
• Illinois filers with incomes over $1.5 million would move from the ninth lowest income taxes among the 41 states to the 35th lowest, meaning their income taxes would become among the highest.
• Those with incomes of $500,000 would move from 11th lowest to 26th lowest.
• Residents with incomes of $150,000 would move in the other direction, from 15th lowest to 13th lowest.
• And those with incomes of $60,000 would move from 24th lowest to 21st lowest.
Gov. J.B. Pritzker, a billionaire heir to the Hyatt Hotel chain, ran his campaign on the promise to change the state constitution to allow a graduated income tax. Both the Senate and House approved putting the constitutional amendment on the 2020 ballot, where it would need approval by more than 60% of the voters to pass.
The House is expected to vote this week on the tax rates and income brackets.
Illinois is one of nine states with a flat income tax rate. Seven states have no income tax, while New Hampshire and Tennessee tax only certain investment income.
Opponents of the graduated tax argue that creating different rates for different levels of income is unfair and will push people to leave the state, which has seen a steady population decline over the past five years.
“A flat tax percentage applied to any taxpayer already hits higher earners harder and produces more revenue from higher earners than lower earners,” said Edward Tiesenga, a village trustee in Oak Brook, one of the few towns in Illinois where the average taxpayer will pay more under the graduated tax plan. “It's a talent for a billionaire to seed class warfare among those far below him in assets and income.”
Under the graduated income tax plan that passed the House Revenue Committee on Friday, tax rates rise in steps, with the first $10,000 in income taxed at 4.75%, the next $90,000 taxed at 4.90%, and the next $150,000 taxed at 4.95% — the current rate under the flat tax. Any income over $250,000 triggers a tax rate of 7.75%. The rate climbs to 7.85% for income over $350,000 for single filers and $500,000 for couples.
The biggest tax increase would come to single filers with income over $750,000 and married couples with incomes over $1 million. Their tax rate would be 7.99%, and unlike people in lower income brackets, they would pay that flat rate on all of their income.
No other state has a formula that taxes some residents on a graduated scale and others on a flat rate.
“I could see that as an issue of legality,” said Jeremy Groves, an associate professor of economics at Northern Illinois University. “You could run into an equal protection issue because of it.”
If approved, only six states would have a higher effective income tax rate on a $1.5 million tax return than Illinois.
Supporters and Pritzker administration officials note that 97% of taxpayers will pay the same or less in income taxes under the graduated plan. And, they say, the rates will actually have a bearing on the middle class, unlike many other states with a graduated rate formula. That includes states like Alabama, Georgia, Idaho, Mississippi, Missouri, New Mexico, Oklahoma, South Carolina and Virginia where the maximum rate is applied to income over $20,000 — in some cases over $3,000.
“Our plan is simpler and it is a true graduated tax,” said Dan Hynes, Illinois's former comptroller and current deputy governor. “And it's designed to be fair statewide.”
The additional $3.4 billion is intended to help pay down a backlog of bills, currently about $7 billion, as well close a $3.2 billion gap in the state's operating budget. The Pritzker administration and legislative Democrats also are pushing other tax and fee hikes.
That concerns some who don't believe the state is doing enough to reduce spending, including pension costs.
“In the abstract, the graduated tax might seem more fair, but the motivation behind the graduated tax is to tax a minority for the benefit of the majority, and it may have unintended consequences,” said Laurence Msall, president of the nonpartisan government research organization the Civic Federation. “There needs to be a more significant structural change in expenditures and consolidation of government and services.”