What voters should know about state’s graduated tax proposal
By Doug Finke
The State Journal-Register
Posted Sep 27, 2020 at 12:01 AMUpdated Sep 28, 2020 at 8:27 AM
Perhaps the biggest race in the upcoming general election doesn’t have any candidates running.
It is the race on whether or not to approve an amendment to the Illinois Constitution to bring a graduated state income tax to Illinois for the first time in its history.
It could be the defining moment in Gov. JB Pritzker’s tenure, something he pledged to bring to the state when he ran for the office and something he’s made a central component during the first half of his term.
Both proponents and opponents argue it will have a profound impact on Illinois’ economic future, with one side saying it is for the good and the other saying the opposite.
Here’s a rundown of what you need to know.
What is a graduated income tax?
It is a tax that applies different tax rates to different levels of income. The federal income tax works this way. People with higher incomes pay higher tax rates.
In fact, most states that have an income tax use a graduated tax system. There are 41 states that have a state income tax. Of those, 32 have a graduated income tax. Only nine, including Illinois, have a flat tax.
What is a flat tax?
Under the Illinois system, all individuals pay the same tax rate regardless if they make $20,000 a year or $20 million a year. Proponents of the current system argue that this promotes economic development and helps discourage lawmakers from raising the income tax. If the tax is increased, the increase must apply to everyone, not just a small group earning a larger income, which makes an increase less likely, they argue.
Proponents of the graduated tax contend it is fundamentally unfair for everyone to pay the same rate regardless of income level. They contend it has promoted income disparity in the state.
Can’t the General Assembly simply make the change?
No. The flat tax is written into the state constitution. It can only be changed by the voters.
There are two ways the amendment can be approved. If 60% of the votes cast on the amendment proposal are “yes,” it will be approved. It will also pass if a majority of all of those voting in the election vote in favor of it.
What will the tax rates be if the amendment is approved?
The General Assembly has already approved the rates that would go into effect if the amendment is approved. Remember, the rate for individuals is now 4.95%.
The new rates would be: 4.75% for income up to $10,000; 4.90% for income between $10,001 and $100,000; and 4.95% for income between $100,001 and $250,000. Those numbers apply for both single and joint filers.
For single filers, the rate is 7.75% for income of $250,001 to $350,000, and the rate is 7.85% for income of $350,001 and $750,000. For joint filers, the rate is 7.75% for income of $250,001 to $500,000, and the rate is 7.85% for income of $500,001 to $1 million.
The top rate is 7.99% for single filers making more than $750,000 and joint filers making more than $1 million.
The corporate rate would increase from the current 7% to 7.99% regardless of income.
One thing to remember is that the rates apply to those different levels of income, except for the highest earners. Thus, even for someone who makes $100,000 a year, the first $10,000 of income is taxed at 4.75%.
For individuals who make more than $750,000 a year and joint filers who make more than $1 million a year, the entire amount of their income is taxed at 7.99%.
Will I pay more under this amendment?
Pritzker and other proponents of the graduated tax have said that 97% of Illinois income tax payers will pay the same as or less than they now pay. Only the top 3% of earners will pay more, they said. That means people with incomes above $250,000 a year.Pritzker’s office has set up an online calculator that people can use to determine how the amendment will affect their taxes. It can be found at https://www2.illinois.gov/sites/gov/fairtax/Pages/default.aspx
That’s a big selling point, right?
For the proponents, it certainly is. But it is also a major reason why the opponents think it is a bad idea.
The opponents contend wealthier residents will be tempted to abandon the state and take their tax dollars with them. They also argue the higher rates on upper incomes will damage economic growth in the state. Finally, they argue that lawmakers will find it easier to raise taxes in the future because they can do it on a smaller number of earners rather than everyone. Inevitably, the opponents argue, those increases will also hit lower income levels.
Supporters of the amendment argue that it is never easy for elected officials to raise taxes making those fears are unfounded. Since no one can predict the future, it comes down to which voices you trust the most.
Will retirement income be taxed by the amendment?
No. Most retirement income isn’t taxed in Illinois now and that won’t change if the amendment is adopted. Amendment opponents are airing an ad showing a woman identified as a retiree saying the amendment will provide “new powers” to the state to tax retirement income. It won’t. The state could tax retirement income now, but it doesn’t because legislators know that is a hugely controversial and unpopular issue.AARP Illinois supports the amendment.
“No matter who has said it or how they have said it, the simple truth is that switching to a graduated income tax does not allow the state to tax retirement income,” the organization says on its web site. “And it does not make it easier to tax retirement income in the future. AARP Illinois adamantly opposes taxation of retirement income and we would not support the graduated income tax if it did.”
Will the graduated tax raise more money?
Yes. For a full fiscal year the graduated income tax is projected to bring in $3.4 billion. If the amendment is approved, the new rates would go into effect January 1 which is midway through the state’s fiscal year. Thus, the full amount won’t be realized immediately.
Pritzker has warned that without the extra income from the graduated tax, the state will likely have to cut spending or raise income taxes across the board. Many Republicans and other opponents of the amendment contend the state spends too much money as it is and budget cuts would not be a bad thing.
Contact Doug Finke at doug.finke@sj-r.com, (217) 788-1527 or twitter.com/dougfinkesjr.
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