Illinois Fair Tax

The Illinois Fair Tax is a proposed amendment to the Illinois state constitution that would change the state income tax system from a flat tax to a graduated income tax. Proponents argue that the proposal would make the Illinois tax code fairer, provide tax relief to the most Illinoisans, boost small businesses, and accelerate job creation ^[1][2] Opponents argue it would open the door to tax hikes that hurt small businesses and drive more job creation to neighboring states.^[3][4]

If approved by three-fifths of the state legislature, the proposal will be voted on in a referendum. While it did not pass in 2014, supporters have vowed to bring the proposal back in future years.^[5] A Better Illinois was the coalition supported by labor unions, faith and civic leaders and small business owners that pushed for the measure and a possible referendum campaign. ^[6][7][8][9]

Legislative history

Under current law, Illinois's state income tax rate in 2015 will be a flat rate of 3.75 percent, a scheduled phase-out of a 2011 temporary tax increase. Illinois lawmakers are wary of extending the increase, as they fear the impact of an extension on Illinois's business climate.^[10]

State Rep. Naomi Jakobsson, an Urbana Democrat proposed and advanced HJRCA 33, the initial House legislative vehicle for the proposal. The bill contains no tax rate schedule, which led the Urbana-Champaign News-Gazette editorial board to criticize statements by the proposal's advocates.^[11] The House Revenue Committee rejected that proposal in March 2014.^[12]

The Senate companion bill, SJRCA 40, passed the Senate Executive Subcommittee on constitutional amendments. It has advanced to the Senate Executive Committee.^[13]

The proposal failed to make the deadline to clear the Senate, and was withdrawn for 2014.^[14]

Rates

Three-year budget projections based on current law show a state budget deficit of $2.4 billion in FY2015 and a $4.4 billion deficit in FY2016. The non-partisan business group Civic Federation of Chicago assessment of the Governor's budget projections estimates that the prescribed cut in income tax will yield decreased revenues of $1.4 billion in FY15 growing to $2.7 billion in FY16.^[15] In its own analysis, the federation projected that the loss of revenue "would dramatically destabilize Illinois' already weak financial condition." They argue that the loss of revenue is bad for Illinois' businesses, due in part to the fact that the state still owes many private businesses money.^[16]

While Gov. Quinn has proposed extending the 5 percent flat tax indefinitely, other groups have sought to use the graduated tax to raise revenues.^[17] The graduated tax proposals would yield an increase in taxes for most taxpayers above current law, although not necessarily the 5 percent rate.

While initial proposals lacked statutory tax rate language leading to criticism from one editorial board,^[11] Sen. Don Harmon (D-Oak Park) proposed a marginal rate schedule that taxed the first $12,500 of income at 2.9 percent, the range from $12,500 to $180,000 at 4.9 percent, and taxed all income over $180,000 at 6.9 percent. The rate schedule is not part of the amendment, but instead separate legislation.^[18]

Senator Harmon's proposal is estimated to reduce the tax bill of the Illinois median taxpayer (making $55,317 per year) by $303 per year versus the 5 percent rate. Allowing current law to continue would reduce the median taxpayer's bill by $689 per year, an additional savings of $386 versus the Harmon rates.^[19] Other speculative proposals have called for top marginal rates as high as 11 percent, but they were not introduced in the state legislature.^[11]

Proponents argue that Harmon's rate schedule would provide tax relief to 94% of Illinoisans. Opponents and skeptics contend that is misleading since current law prescribes a decline in the personal income tax rate to 3.75 percent in 2015, after the expiration of a 2011 temporary surtax. They contend Harmon calculates his claimed tax relief from current rates rather than current law.^[20]

Proponents argue that it is misleading to suggest Harmon's rates are anything but a tax cut because many Illinois residents would pay less in 2015 than they pay now.^[21]

Arguments

Proponents argue for a tax system that includes lower rates for those with lower incomes and higher rates for those with higher incomes, claiming such a system is fairer.^[22] They point out that low and middle income families pay a percentage in taxes that is two to three twice that of the very rich, when factoring in all state and local taxes paid. They say this is deeply unfair and is due to a lack of investment by the state, which falls on local taxpayers, who are least able to afford it.^[23][24][25]

Opponents argue that the change is cover for a state government cash grab.^[26] The Harmon rates would generate $23 million less than the 5% flat rate, but increase tax collections over current law.^[27] Some members of the public expressed skepticism to a SouthtownStar writer that the unpopular state government can be trusted to use a graduated system properly.^[28]

Proponents, which include a coalition backed heavily by public-sector labor unions,^[29] claim the phase-out of the 2011 temporary tax increase will leave the state with a $5.4 billion deficit.^[30] Proponents argue that failure to restore tax revenue above the 2011 tax rates would lead to cuts in early childhood education, college aid, and prisons.^[31][32][33]

Proponents also say the state's outdated tax system hurts economic growth and is bad for small businesses.^[34] Opponents argue that adopting a new tax system will make Illinois businesses even less competitive.^[4]

References