A proposed constitutional tax amendment derided by business
By Dennis Grubaugh
Illinois Business Journal
The business community is loudly speaking out against a proposed constitutional amendment on income taxes facing voters in Illinois.
The governor backs the measure, which would change the state’s income tax from a flat tax to a graduated one based on income. He says the revenue generated would help address the state’s dire financial situation, but opponents say the change will open the way for legislators to take advantage of taxpayers, even long into the future.
“This is a generational change,” said Todd Maisch, the president and CEO of the Illinois Chamber of Commerce. “The amendment makes it easy as possible for legislators to be as creative as possible to get into your checking account.”
Most ballots refer to the measure simply as a Constitution Amendment, but variously it’s coined as the fair tax amendment or the progressive (graduated) tax amendment.
Make no mistake, business sees nothing fair about it.
Maisch said a recent independent study of the issue concludes “what many of us already knew: This is the worst possible time for a $3.6 billion tax hike on Illinois families and businesses. The pandemic has already crushed small-business owners, manufacturers and farmers, and this independent study proves that the tax hike amendment would be the last straw for many more.”
A “yes” vote would support repealing the state’s constitutional requirement that the state personal income tax be a flat rate and instead allow the state to enact legislation for a graduated income tax.
A “no” vote opposes a constitutional amendment and would continue to require that the state personal income tax be a flat rate and prohibit a graduated income tax.
In June 2019, Gov. J.B. Pritzker signed SB 687, which would enact a graduated income tax if voters approve. SB 687 would change the state’s income tax from a flat rate to graduated rates beginning on Jan. 1, 2021.
Voting on the issue began Sept. 24 and will conclude on Election Day, Tuesday, Nov. 3.
“The Illinois Chamber is very much opposed to this amendment,” Maisch said recently, speaking to members of Leadership Council Southwestern Illinois. He said a growing coalition of opposition includes the Illinois Farm Bureau, National Federation of Independent Business-Illinois, manufacturing entities and many local chambers, including the Edwardsville/Glen Carbon Chamber of Commerce.
If approved, Illinois would join some 32 states that operate under a progressive tax system.
Under the Illinois Constitution adopted in 1970, taxes are set at a flat rate, currently 4.95 percent. There are two basic protections in the law. One, is that the state and only the state, not any jurisdictions within the state, can levy a one-time annual tax based on income. The other is that the state is capped on the tax rate it can levy on corporations, currently 9.5 percent.
“If this amendment goes through, both of those taxpayer protections go away,” Maisch said.
He said that a flat rate does not mean that the existing rate can’t be gradually increased.
“Illinois actually has a modestly graduated structure because of tax breaks for lower income people that phase in as tax breaks for people of higher incomes phase out. We believe that the flat tax IS the fair tax.”
Under SB 687, there would be six tax brackets:
• Everyone making up to $10,000 annually would be taxed at 4.75 percent (both single and joint filers)
• Those making between $10,000 and $100,000 would be taxed at 4.9 percent.
• Those making between $100,000 and $250,000 would be taxed at 4.95 percent.
• Those making between $250,000 and $350,000 would be taxed at 7.75 percent.
• Single taxpayers making $350,000 to $500,000 would be taxed at 7.85 percent, while joint filers would be taxed at 7.75 percent.
• Those making between $500,000 and $750,000 would all be taxed at 7.85 percent.
• Single taxpayers making between $750,000 and $1 million would be taxed at 7.99 percent while joint filers would be taxed at 7.85 percent.
• Everyone making more than $1 million would be taxed at 7.99 percent.
Because the proposed rates are set in statute, not the Constitution, they can be increased at any time, the Chamber says.
And, there are no requirements on how the revenue can be spent. For example, there is no required property tax relief, no required public education spending or no required debt reduction.
An independent analysis conducted by Berkeley Research Group in conjunction with Ariel R. Belasen, professor at Southern Illinois University Edwardsville, predicts that passage of the graduated income tax on the November ballot would have devastating consequences to Illinois’ economy, consumers and jobs. If passed, the group says, the amendment would shrink Illinois’ economy by nearly $2 billion, increase consumer costs by $332 million, lead to outmigration that would reduce household spending, and result in disproportionately more job losses in hospitals, restaurants and individual and family services that tend to employ more women and minorities.
The authors of the study were granted complete independence to provide an objective analysis of the effects of the amendment.
“Our report shows that the graduated income tax would be a devastating hit to Illinois’ already struggling economy,” said Belasen, a Ph.D.
The key findings of the independent analysis include:
Job losses would disproportionately affect women and minorities: Three of the four sectors of the economy that the economic model indicates will be hardest hit by the tax increase — hospitals, restaurants and individual and family services – tend to employ relatively more workers from these demographic groups.
Reduction in GDP: Approval of the proposed Constitutional Amendment will cause up to a $1.8 billion reduction in the income of Illinois residents annually, as measured by the state’s gross domestic product.
Higher corporate taxes will be passed on to consumers: The corporate tax rate will increase from 9.5 percent to 10.49 percent (an increase of 10 percent), the second highest in the country. Studies show that some portion of revenues arising from an increase in the corporate tax rate ($332 million) would be passed on to suppliers and customers, increasing prices on goods and services, and potentially suppressing worker wages.
Outmigration of thousands of high-income households: Some of the job losses will result from reduced spending on food and services arising from an increase in the rate of outmigration by Illinois residents seeking to escape the relatively heavy tax burden that the state imposes on its residents. Based on the most-recent empirical studies by economists, the study estimates that increased outmigration will lead to a reduction in household spending by taxpayers in the affected income brackets of up to 0.8 percent.
Because the proposed tax change would cost the largest wage earners the most, Illinois stands to lose a lot of its wealth, entrepreneurs and success, Maisch said.
The top 1 percent of wage earners account for 25 percent of all state income taxes, he said. “That tracks very closely with their share of income.”
Around 20 percent of taxpayers account for about two-thirds of all income taxes paid to the state, he said.
Maisch said there are several “myths” being used to sell the idea of a progressive tax. One is that the taxes generated would pay off Illinois’ debt. However, the changeover to a graduated tax would only generate an additional $3.6 billion, far short of the hole faced in Illinois, which has a $7.5 billion general fund deficit, he said.
“Without real reforms in spending, the current progressive tax plan only dents Illinois’ problems,” he said.
Another myth is that only the wealthy will pay more.
“Connecticut instituted a millionaire’s tax in 2008 to tax those filing joint income taxes over $1 million at a higher rate. In seven years, Connecticut went from two tax brackets to seven. By the end the tax increase was ineffective for anyone making $50,000 and more.”
Illinois already has the second-highest property taxes nationally (only New Jersey is higher.)
“The progressive tax increase is the same thing as leaving a huge bag of taxpayers’ cash at the backdoor of the statehouse and city hall. Politicians arrogantly demand that hard-working taxpayers trust them to spend the money wisely. We don’t,” Maisch said.
Illinois Farm Bureau President Richard Guebert Jr. said making the change would lead Illinois down the same path as other states.
“To cover all of Springfield’s spending and debt, the tax brackets and rates will have to be changed to raise taxes on the middle class and even the working poor, with higher rates starting at incomes as low as $25,000 per year. So while proponents claim the progressive tax would only tax ‘the rich,’ many of whom are local leaders like family farmers who are investing in their communities and creating jobs, the truth is that this amendment will open up every Illinoisan to tax increases.”