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 most Illinoisans, boost small businesses, and accelerate job creation.[1][2] Opponents argue it would open the door to future tax hikes that hurt all taxpayers, small businesses, and drive more job creation to neighboring states.[3][4]

Not to be confused with FairTax.

The proposal would require a constitutional amendment, which would have to be approved by Illinois voters in a referendum. The "Fair Tax" proposal was initially raised in 2014, but was not passed by the Illinois legislature.[5] In 2019, a similar proposal was approved by the Illinois legislature and signed by governor J. B. Pritzker. The graduated income tax proposal, formally titled the "Allow for Graduated Income Tax Amendment", will be on the November 2020 election ballot in Illinois as a legislatively referred constitutional amendment.[6]

Context
See also: State income tax
See also: Progressive tax

Under current law, Illinois's state income tax rate is a flat rate of 4.95 percent. A flat income tax, which taxes all income levels at the same rate, is required by the current Illinois state constitution.[7] Illinois is one of 18 U.S. states with a flat income tax or no income tax; 32 other states use graduated income taxes, which tax higher incomes at a higher rate.[8] The last state to switch from a flat state income tax to a graduated state income tax was Connecticut in 1996.[9][10]

Legislative history

2013-14: First attempts to pass graduated income tax in Illinois

In 2013, 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 Jakobsson's proposal in March 2014.[12]

The Senate companion bill, SJRCA 40, passed the Senate Executive Subcommittee on constitutional amendments. It advanced to the Senate Executive Committee.[13] The 2014 Senate proposal failed to make the deadline to clear the Senate, and was withdrawn.[14]

2019: Graduated income tax passes legislature, signed by Pritzker

On May 1, 2019, the Illinois Senate voted to approve Senate Joint Resolution Constitutional Amendment 1, a constitutional amendment which would allow Illinois to change from a flat tax rate to a graduated rate, by a 36–22 vote.[15] On the same day, the Illinois Senate voted to approve Senate Bill 687, which lays out the proposed new tax structure which will only go into place if voters approve Constitutional Amendment 1.[16][17]

On May 27, the Illinois House approved Constitutional Amendment 1 in a 73–44 vote, two votes more than the 71 votes needed to pass, in what the Chicago Tribune called a "historic vote".[15][18][19][20] The Constitutional Amendment proposal will be sent to voters for a 2020 referendum after it passed both houses of the legislature with 3/5 approval. The House passed Senate Bill 687 three days later.[16] Illinois Governor J. B. Pritzker signed Senate Bill 687 on June 5, 2019.[21]

The proposed new tax structure under Senate Bill 687 would raise taxes on Illinois taxpayers making over $250,000. It also includes $100 million for property tax relief.[20] The proposal is referred to as the "Illinois Fair Tax" on the Illinois government website.[22]

The proposed constitutional amendment to allow Illinois to impose a non-flat income tax will be on the ballot in the November 3, 2020 general election.[6][19] To pass, it requires 60 percent of the votes on the ballot measure itself, or a simple majority of all of those voting in the election.[23]

The Amendment

The amendment to be voted on in November, 2020, would replace Article IX, Section 3 of the Illinois Constitution with the following language:[24]

SECTION 3. LIMITATIONS ON INCOME TAXATION

(a) The General Assembly shall provide by law for the rate or rates of any tax on or measured by income imposed by the State. A tax on or measured by income shall be at a non-graduated rate. At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations. In any such tax imposed upon corporations the highest rate shall not exceed the highest rate imposed on individuals by more than a ratio of 8 to 5.

(b) Laws imposing taxes on or measured by income may adopt by reference provisions of the laws and regulations of the United States, as they then exist or thereafter may be changed, for the purpose of arriving at the amount of income upon which the tax is imposed.

It is important to note that the amendment does not change rates, it simply asks if lawmakers can have more control to set tax rates in the future. That means lawmakers could set tax rates as they choose without voter input in the future, as noted in The Southern Illinoisan. [25]

Rates

The amendment itself would remove the requirement that income be taxed at a flat rate. Separate legislation, which would go into effect if the amendment passes, specifies the actual tax rates. The legislature would be free to change those rates in the future without voter approval.

Under the new rates single filers would pay the maximum rate of 7.99 percent on all income once their taxable income tops $750,000. For joint filers, that rate takes effect on all income when it exceeds $1 million.[26]

For the rest of the brackets, each varying tax rate would apply to only one specific margin of income.

The rates are 4.75 percent on taxable income from $0 to $10,000; 4.9 percent from $10,001 to $100,000; 4.95 percent from $100,001 to $250,000; 7.75 percent from $250,001 to $500,000; and 7.85 percent from $500,001 to $1 million.

For single filers, tax rates are the same as joint filers up to $250,000; but the 7.75 percent rate applies from $250,001 to only $350,000, while the 7.85 percent rate applies from $350,001 to $750,000.

The bill also includes an increase in the property tax credit from 5 percent to 6 percent, and up to a $100 per-child tax credit for couples earning less than $100,000 and single persons earning less than $80,000.

In January 2014, the non-partisan business group Civic Federation of Chicago's assessment of the Governor's budget projections estimated that the prescribed cut in income tax would yield decreased revenues of $1.4 billion in FY15 growing to $2.7 billion in FY16.[27] In its own analysis, the federation projected that the loss of revenue "would dramatically destabilize Illinois' already weak financial condition." They argued that the loss of revenue would be bad for Illinois' businesses, due in part to the fact that the state still owed many private businesses money.[28]

While Gov. Quinn had proposed extending the 5 percent flat tax indefinitely, other groups had sought to use the graduated tax to raise revenues.[29]

While initial proposals lacked statutory tax rate language leading to criticism from one editorial board,[11] in 2014 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 was not part of the amendment, but was instead separate legislation.[30]

Senator Harmon's proposal was 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 2014 law to continue would reduce the median taxpayer's bill by $689 per year, an additional savings of $386 versus the Harmon rates.[31] Other speculative proposals had called for top marginal rates as high as 11 percent, but they were not introduced in the state legislature.[11]

Proponents argued that Harmon's rate schedule would provide tax relief to 94% of Illinoisans. Opponents and skeptics contended that was misleading since the current law in 2014 prescribed a decline in the personal income tax rate to 3.75 percent in 2015, after the expiration of a 2011 temporary surtax. They contended Harmon calculated his claimed tax relief from current rates rather than current law at the time.[32]

Proponents argued that it was misleading to suggest Harmon's rates were anything but a tax cut because many Illinois residents would pay less in 2015 than they paid in 2014.[33]

Arguments

Among the opponents arguing that lawmakers with a history of broken promises in Springfield cannot be trusted with yet another "cash grab,"[34] the Illinois Opportunity Project takes it a step further. The group says the proposed change shows a clear concern that Gov. J.B. Pritzker cannot "navigate Illinois' trouble financial waters." [35] With lawmakers breaking promises to roll back taxes in 2011 and again in 2017[36], only to add more than $4 billion in taxes to the ledger in 2019[37], gives Illinois citizens pause on adding to the highest tax burdened states in America.[38]

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.[39]

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.[40] They point out that low and middle income families pay a percentage in taxes that is two to three times 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.[41][42][43]

Proponents, which included a coalition backed heavily by public-sector labor unions,[44] claimed the phase-out of the 2011 temporary tax increase would leave the state with a $5.4 billion deficit.[45] Proponents argued that failure to restore tax revenue above the 2011 tax rates would lead to cuts in early childhood education, college aid, and prisons.[46][47][48]

Proponents have also said the state's "outdated" tax system has hurt economic growth and is bad for small businesses.[49] Opponents argued that adopting a new tax system would make Illinois businesses even less competitive, [4] with the potential to impact 110,000 small businesses and drive more people out of the state of Illinois. The Illinois Opportunity Project argues that the progressive tax will likely result in a tax hike of $3,500 on the typical Illinois family. [50] The median household income in Illinois is $63,575. [51] The tax rate will not increase for families making less than $250,000.[52]

Support and opposition

Vote Yes For Fairness is the organization leading the campaign to support the amendment. It is headed by Quentin Fulks, who is also the head of Think Big Illinois and was a staffer on Pritzker's 2018 gubernatorial campaign.[53]

Greg Baise formed the Vote No on Blank Check Amendment Committee to oppose the Illinois Fair Tax.[54]

Endorsements
For
Officeholders
Organizations
  • Think Big Illinois[57]
Against
Officeholders
Organizations

Polls
Poll source Date(s)
administered		 Sample
size		 Margin
of error		 Support Oppose Undecided
Paul Simon Public Policy Institute[63] March 11–17, 2019 1,000 ± 3.1% 67% 31% 2%
University of Illinois Springfield
Survey Research Office [64]		 September 13–23, 2019 1,012 ± 3.5% 67% 33% N/A
Paul Simon Public Policy Institute[65] February 10–17, 2020 1,000 ± 3.1% 65% 32% 3%

Election

The proposed amendment with be on the ballot during the November 2020 election in Illinois as a legislatively referred constitutional amendment.[6] In order to be approved, the measure will be required to receive either 60% support among those specifically voting on the amendment or 50% support among all ballots cast in the state's November elections.[66]

Allow for Graduated Income Tax Amendment
Option Votes % of votes
on referendum		 % of all ballots
cast
For TBD TBD TBD
Against TBD TBD TBD
Total votes TBD 100 TBD
Voter turnout TBD
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References
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  2. "Businesses need a fairer Illinois income tax - DailyHerald.com". dailyherald.com. Retrieved 2014-03-30.
  3. Haas, Kevin (10 February 2014). "Illinois GOP lawmakers slam graduated income tax proposal at Rockford event". rrstar.com. Rockford Register Star. Retrieved 11 March 2014.
  4. "What's the Matter With Illinois?". wsj.com. The Wall Street Journal. 15 April 2014.
  5. Hinz, Greg (30 April 2014). "RIP, Illinois progressive income tax?". ChicagoBusiness.com. Crain's Chicago Business. Retrieved 1 August 2014.
  6. Sfondeles, Tina (May 27, 2019). "Graduated income tax question heads to ballot as House OKs constitutional amendment". chicagosuntimes.com. Chicago Sun Times. Retrieved May 30, 2019.
  7. Bremer, Shelby. "Illinois' Graduated Income Tax Plan: What You Need to Know". NBC Chicago. Retrieved 15 September 2019.
  8. "2019 State Individual Income Tax Rates and Brackets". Tax Foundation. 2019-03-20. Retrieved 2020-01-21.
  9. Pinho, Rute (June 14, 2018). "Connecticut Income Tax Rates and Brackets Since 1991" (PDF). Connecticut Office of Legislative Research. Retrieved January 20, 2020.
  10. "How Connecticut's 'tax on the rich' ended in middle-class tax hikes, lost jobs and more poverty". Illinois Policy. 2019-03-04. Retrieved 2020-01-21.
  11. "Legislator at war with tax facts". News-Gazette.com. The News-Gazette. 13 October 2013. Retrieved 11 March 2014.
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  13. "Income Tax Amendments".
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  16. "Illinois General Assembly - Bill Status for SB0687". ilga.gov.
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  38. https://www.illinoispolicy.org/illinois-state-local-tax-burden-ranked-highest-in-nation/
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  40. Dey, Jim (February 23, 2014). "Taxation is first order of business for state legislators". The News-Gazette. Retrieved 15 April 2014.
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  60. @1980reagan (18 June 2019). "The Progressive Tax plan would lead to an eventual tax massacre of our middle class! I'm confident that Illinois voters will join me in rejecting the Jobs Tax Constitutional Amendment next November. #twill" (Tweet) – via Twitter.
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