Move Illinois to a fairer tax system

This November Illinois voters will get the chance to ratify two potential amendments to the state's Constitution. The first would establish rights for crime victims. The second would expand protections of the right to vote. Here's hoping a third amendment gets on the ballot - the one proposed by state Sen. Harmon and state Rep. Mitchell that would allow state income tax rates to track ability to pay by assessing lower rates on lower levels of income and higher rates on higher levels of income. If it gets on the ballot, this initiative would permit Illinois voters to decide if they'd like to be taxed in a manner that is fairer than current law.

Why would this create fairer taxation? Well, it would respond to how income gets shared in the modern economy. Indeed, it's textbook tax policy that a fair income tax must vary based on ability to pay. This venerable principle goes back to 1776 and Adam Smith, the father of capitalism. In his seminal work, "The Wealth of Nations," Smith posited that a fair tax in a capitalist economy should "remedy inequality of riches as much as possible, by relieving the poor and burdening the rich."

Smith contended that would be fair in a capitalist economy because affluent folks would receive a disproportionate share of income growth over time. IRS data show Smith was right. From 1979 to 2011, after adjusting for inflation, the wealthiest 10 percent in America realized 139.8 percent of national income growth - or more than all of it. That means on average 90 percent of all Americans earned less in real terms in 2011 than in 1979.

So to treat taxpayers fairly Illinois needs the flexibility to tax lower levels of income at lower rates than higher levels of income - something 33 of 41 states with an income tax do but the Illinois Constitution prohibits.

This constitutional prohibition is a primary reason Illinois is one of the three most unfair taxing states in America, imposing tax burdens (as a percentage of income) on low- and middle-income families that are more than double that of millionaires.

Won't taxing rich folks more scare millionaires out of Illinois and tank its economy? Well, no. No peer reviewed study has found that tax policy has a statistically meaningful correlation to domicile choices by people generally or millionaires specifically. Housing costs, location of family members, weather and job considerations are what matter. Indeed, four of the five states with the greatest number of millionaires per capita are high income tax states, with Maryland, which passed a higher tax on top-earners a few years ago, ranking first.

As for killing the economy, well, over the last decade, the nine states in America with the highest marginal income tax rates had better growth in state GDP per capita and better change in median wage than the nine states that have no state income taxes at all - including Texas and Florida. In fact, the evidence overwhelmingly indicates there's no meaningful correlation between state tax policy and economic competitiveness - other things matter far more, like public sector investment in education and infrastructure (which are particularly important to small business owners), or availability of natural resources and climate-based advantages (think palm trees and beaches). Indeed, small business owners should benefit from a fair tax, given that two-thirds reported income of $50,000 or less in the most recent tax year.

Since nine out of 10 workers earn less after inflation today than 30 years ago, using a fair rate structure to cut their taxes means they'll likely spend their tax relief buying stuff. This should stimulate the economy, because around 68 percent of all economic activity is consumer spending. Meanwhile, an income tax increase on wealthier folks won't diminish their spending, given their dramatic growth in real income. The case for moving to a fair, graduated income tax is compelling, so let's hope legislators give voters the right to choose fair taxation this November.

• Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank.