Graduated income tax is a smart and fair way to begin to address Illinois budget deficit
June 1, 2018

The Center for Tax and Budget Accountability (CTBA) contends that Illinois’s current flat-style income tax model benefits high income earners (gee, what a surprise) and puts a disproportionate tax burden on everyone else, but that a graduated income tax (also known as a progressive income tax) would not only be fairer but could put about $2 billion more per year in the State’s coffers. We agree, and support this effort.

No, a shift to a graduated income tax will not solve Illinois $14.6 billion deficit and massive pension shortfall, estimated to be $130 billion, but it is a start. The current Illinois income tax system certainly is not working and it is time we take a different and more equitable approach.

It’s a simple idea, but one that isn’t warmly embraced by many politicians who don’t want to turn off their campaign contributions from their wealthy supporters. The concept is to tax richer people at a higher rate than less well-off people because richer people can afford it more easily—and still will have much more money left after taxes than those with lower incomes.

In Illinois now, middle class and low-income people are actually taxed disproportionately high, according to the CTBA. Its study on taxes says, “for the middle 20% of earners, Illinois has the third largest state and local tax burden as a percentage of income nationally, while for the bottom 20% of earners, Illinois is second highest.”

A graduated income tax would positively alter the financial behavior of middle and lower-income Illinoisans. Instead of considering leaving the state or staying and barely scraping by, history has shown that middle- and lower-income people, when they can take more of their pay home, make more purchases, spend more money in local stores, and, ironically, pay more in state sales taxes. This will improve business for manufacturers and retailers alike in Illinois, and improve the state’s economy overall.

Minnesota, a Midwestern state similar to Illinois, and one whose legislature some would argue actually gets things done more effectively, has a graduated income tax that is projecting a $329 million budget surplus for next year. “Budget surplus” are two words that have not been uttered in Illinois for decades.

Despite the tax’s successful history in other states, some opponents act as if this is a radical socialist idea dreamed up by Marx and Lenin themselves. Others who are less radical, and more protective of the assets held by the Top 1%, make the argument that if we tax rich people at a higher rate, they will be hurt economically to such a degree that, like the Clampett family in the Beverly Hillbillies TV show of the 1960s, they’ll load up the truck and move out of state.

There has been no mass departure from graduated income tax states such as Minnesota, Oregon, and Arizona. One of the major tools that California used to dig itself out of its financial hole in only two years’ time was its enactment of the most progressive/graduated income tax in the nation. That and a sales tax hike helped California raise an additional $6 billion per year, and now its economy is booming to the tune of 3.5% growth statewide and its lowest unemployment rate since 2008, keeping its residents in state.

We sincerely doubt that there is going to be a mass exodus of wealthy people from Illinois if a graduated income tax is introduced. With all of the cultural amenities, entertainment venues, and educational opportunities that Chicago and the surrounding communities have to offer, we don’t see higher income earners heading in masse to low tax states like Alabama or Montana.

What we do have is an exodus from Illinois now of middle and lower income people. An extra percentage of tax does not make the wealthy alter their behavior substantially, but for middle and lower income people, a move out of state may make the difference between constantly struggling to make ends meet or having a few extra dollars to meet family needs. Consequently, Illinois is a state that is losing population.

A bill in the Illinois General Assembly supported by many of our local legislators advocates for the adoption of a graduated income tax in Illinois. For the tax to be adopted, the General Assembly would have to approve a constitutional amendment that would then go to on the ballot for ratification by the voters.

Despite the recommendations of the Center for Tax and Budget Accountability and some legislators about the benefits of a progressive income tax, there are plenty of alternative bad ideas out there for dealing with the State’s budget woes.

Economists from the Federal Reserve Bank of Chicago released a report May 7 suggesting that a one percent Statewide residential property tax, in addition to current property taxes, is the answer to addressing the pension funding crisis. Under that plan, owners of homes worth $250,000 or more (which is pretty much most homes these days, particularly in this community) would pay an additional $2,500 more for 30 years. If your home is worth $500,000 you would be burdened with an additional $5,000 annually in property taxes.

Yikes, that is one bitter pill to swallow. Our only question is, who among the middle and lower-income families who own homes in Chicago currently would even be left in three to five years? 

The Federal Reserve’s ridiculous idea shows that we should not look to the Federal government, with its ineptitude and gridlock, to solve Illinois’s fiscal problems. We have to do it ourselves.

Since the progressive income tax is not by itself going to solve Illinois’s budget deficit, it should be coupled with a transaction tax. We have written about the proposed transaction tax before—a small tax on big financial transactions, such as stock and securities transfers. Like the progressive income tax, it would cost the wealthy just a little more without causing them undue hardship. Also like the progressive income tax, it has a track record of success in other places, including such economically stable countries as Belgium, Finland, Japan, and Sweden.

In this election year, we sincerely hope that the candidates for governor and the Illinois General Assembly will get on board with the graduated income tax and transaction tax during the campaign, and enact them once they take office. But then again, it is an election year and how many candidates (especially Republicans) will even go near this issue? In the meantime, our State will continue to drown in debt and middle and lower-income wage earners will sadly continue to carry an unfair burden of the load.