Fair graduated income tax would be good for Illinois

Illinois' new Governor JB Pritzker wants to amend the Illinois Constitution to allow income tax rates to correspond to ability to pay. Hence, higher income levels would be taxed at higher rates than would lower income levels. This is known as a "graduated" income tax. It's also sound, fair, tax policy.

First, consider fairness. It's textbook-capitalist-tax policy that a fair tax varies based on ability to pay. This principle goes all the way back to 1776 and Adam Smith, the father of capitalism. In the Wealth of Nations, Smith wrote that tax policy in a capitalist economy should "remedy inequality of riches as much as possible, by relieving the poor and burdening the rich."

Smith posited this would be fair taxation in a capitalist economy, because the wealthy would receive a disproportionate share of income growth over time.

An analysis of IRS data by economists Emmanuel Saez of UC Berkeley and Thomas Piketty of the Paris School of Economics shows Smith was right. Indeed, they found that after inflation, 108.4 percent of total personal income growth - more than all of it - went to the wealthiest 10 percent from 1979-2015.

That means fully 90 percent of all workers in America averaged earning 8.4 percent less in real terms over this period.

To respond to that reality and be fair to taxpayers, Illinois needs the flexibility to tax lower levels of income at lower rates and higher levels at higher rates - something the state Constitution prohibits.

This makes Illinois a tax outlier. Thirty-three of the 41 states in America with an income tax, or 80 percent, have a fair, graduated rate structure. Illinois is one of only eight that doesn't. This is a primary reason Illinois consistently ranks as one of the five most unfair, regressive taxing states in the country.

That's not only unfair, it also makes no fiscal sense. To work fiscally, taxes have to respond to where the economy is expanding, not contracting. Focusing taxes on low- and middle-income families, a demographic that's losing income in real terms over time, means tax revenue growth can't keep pace with economic growth, helping create a "structural deficit." A "structural deficit" exists when, adjusting solely for inflation and population change and assuming a normal economy, revenue doesn't increase at a rate sufficient to maintain current service levels from year to year. Illinois has had a structural deficit since at least the late 1970s.

As for deficit scolds who claim Illinois has a spending not a revenue problem, there's simply no data to support their claim. Since 2009, Illinois General Fund spending on the core services of education, healthcare, social services, and public safety is down by over $1 billion - without adjusting for inflation. The only meaningful increase in spending since FY2000 has been for repaying the pension debt Illinois incurred over decades to hide its structural deficit.

And no, raising taxes on the affluent won't scare millionaires away - in fact four of the five states with the most millionaires per capita have special "millionaire" tax rates. It won't kill the economy either. From 2006-2016, the nine states in America with the highest marginal income tax rates had better growth in state GDP per capita and median wages, and lower unemployment rates, than the nine states in America that have no state income taxes at all - including Texas and Florida.

In fact, given that nine out of 10 workers earn less today in real terms than 30 years ago, using a graduated rate to cut their taxes means they'll likely spend what they get in tax relief buying stuff in the local economy. This will stimulate growth, because around 68 percent of all economic activity is consumer spending. Meanwhile, focusing an income tax increase on wealthier folks won't diminish their spending, given the dramatic real growth in income they've realized over time. The bottom line: A fair, graduated rate income tax would be a positive step forward for Illinois.

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