Will a graduated income tax help ensure fiscal order in Illinois?

Not everyone agrees what constitutes sound fiscal policy for Illinois, particularly when it comes to the proposed graduated income tax amendment to Illinois' Constitution that voters will consider this fall.

Amendment opponents say the current flat income tax rate of 4.95% is effective.

"The flat tax is working exactly how it should. People are paying their fair share," said Todd Maisch, president and CEO of the Illinois Chamber of Commerce.

Proponents disagree. They say a graduated income tax, in which people with more income pay a higher tax rate, best ensures people are taxed fairly. They say it would bring in more than $3 billion at a time when the state is spending more and losing revenue as a result of the COVID-19 pandemic.

"If you have a flat rate and you need to increase revenue, you have to increase taxes for low- and middle-income families," said Ralph Martire, executive director for the Center for Tax and Budget Accountability, a Chicago-based bipartisan think tank. The only way to avoid that is to have a graduated rate structure that shifts the tax burden to upper-income families, he said.

Maisch says supporters simply want to spend more money and are willing "to tell a certain portion of the population it's going to be somebody else who pays the tab and not you."

Tax rates would not be part of the constitutional amendment but are set in separate legislation. Under a plan approved by the legislature and signed by Pritzker, 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 state's current flat tax rate.

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 is single filers with income over $750,000 and married couples with incomes over $1 million. Their tax rate is 7.99%, and unlike people in lower income brackets, they would pay that flat rate on all of their income.

At least 60% of those voting on the question must approve the amendment for it to be adopted.

Maisch said the language of the Nov. 3 ballot measure could allow legislators to raise taxes more easily in the future. The legislature already has the power to change the flat income tax rate and has raised and lowered it in recent years. According to Maisch, the proposal gives state government the ability to decide to tax specific types of income - such as carried interest or rental income - which is currently prohibited.

"There's really no reason to think this opens the door to other taxation," said Martire, who calls the claims unsubstantiated and hypothetical. "The language designed for this amendment ... doesn't even require a graduated rate structure, it just allows one."

What's more, Martire says, the state can reinstate a flat tax in the future if legislators decide to do so.

Maisch said he doubts millionaires will "stick around to pick up the tab for everyone else," leaving the fiscal burden to middle- and lower-income earners.

Martire describes as "meritless" Maisch's claim that wealthy residents will leave Illinois if the measure passes.

"There has never been a peer-reviewed study ... that shows any statistically meaningful correlation at all between tax policy and migration in or out" of a state, Martire said.

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Todd Maisch
Ralph M. Martire
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