Progressive income tax: Money grab disguised as tax reform

October 10 2012

The problem
The same forces that helped Quinn land the governorship in 2010 and raise income taxes in 2011 are laying the groundwork for a progressive tax initiative. They want to make the temporary 2011 tax hike permanent and tax certain individuals at ever-higher marginal rates. This initiative, outlined in a February 2012 report, The Case for Creating a Graduated Income Tax in Illinois, is being heavily circulated by the union-funded Center for Tax and Budgeting Accountability, or CTBA.

The truth is that a progressive income tax will mean higher taxes for middle-class Illinoisans and destroy needed jobs for poor and working families. It’s time to dispel the myths underlying the progressive tax. The CTBA plan:

  1. Increases taxes by $6.4 billion when compared to the 2015 sunset of the 2011 income tax hike. Increases taxes by $8.64 billion when compared to a repeal of the 2011 income tax hike.
  2. Cuts Illinois’ economic output by as much as $19 billion to $26 billion.
  3. Destroys, at a minimum, 65,000 to 88,000 Illinois jobs.
  4. Increases taxes on 85% of filers. Uses 5% marginal tax rate, not the 3.75% sunset rate.
  5. Means higher tax rates for middle class. 31 of the 34 progressive-tax states tax families with taxable income of $50,000 at a higher marginal tax rate than Illinois’ 2015 tax rate of 3.75%.
  6. Means higher tax bills for middle class. Under Hawaii’s tax scheme, which most resembles the CTBA’s, Illinois families with taxable income of $50,000 would pay $881 more in yearly income taxes, a 35% increase.
  7. Will send Illinois budgets through the “Revenue Rollercoaster.” A progressive tax exaggerates swings in revenues and spending, leading to higher deficits.
  8. Is not “modernization,” but a step backwards. If not for the Great Recession, the old flat income-tax rate of 3% would have yielded adequate state revenues – the “modernized” progressive tax is unnecessary.
  9. Will hurt economic performance. The nine states with the highest state income tax rates performed significantly worse than the nine states with no personal income tax from 1999-2009.
  10. Will make Illinois taxes even higher and worsen its ranking. Illinois is already the 8th highest taxing state nationally (total stateand-local taxes paid to home state per capita).
  11. Imposes a discriminatory, predatory tax that encourages class envy and class warfare. People use the progressive tax to “tax thy neighbor not thyself.”
  12. Will unleash the “Grim Creeper” on the middle class. In California a 9.3% rate applies to people earning only $48,000 — higher tax rates creep down the income ladder.

The solution
Illinois should discard any notion of enacting a progressive income tax. Instead the state should become more competitive by repealing the record 2011 income tax increase and reforming its public pensions, Medicaid and other spending programs. Long term, the state should start a discussion about how best to abolish its personal income tax – joining nine states that do not tax personal income.

Why this works
The best way to help the poor is not to plunder the middle class and rich; rather, it’s to eliminate the income tax altogether so everyone can keep the fruits of their labor and reinvest it in themselves or their businesses. Pro-growth policies best incentivize work, investment andupward mobility for all. These pro-growth steps would be good for family budgets, good for the state’s economy and good for the poor.