Businesses could face higher rates with progressive tax

Learn more about the disadvantages of a progressive income tax.

Kristina Rasmussen
Executive Vice President

The folks over at Illinois Review were the first to post the text of the progressive tax constitutional amendment that is filed perennially by Democratic legislators in Illinois.

Here’s the key text of House Joint Resolution Constitutional Amendment 2, sponsored by Rep. Naomi D. Jakobsson, D-Champaign:

(a) A tax on or measured by individual income may shall be at a graduated or 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. Any such tax imposed on corporations shall be at a non-graduated rate. In any such tax imposed upon corporations the rate shall not exceed the average of the lowest and highest rates rate imposed on individuals by more than a ratio of 8 to 5.

You’ll want to watch this measure very carefully during the course of the next two years. It just may be the vehicle used to refer out a constitutional amendment to hike personal income taxes again in Illinois.

It’s worth pointing out that a yes or no vote on this constitutional amendment wouldn’t set the statutory tax rates. In fact, once given the okay by voters to impose a progressive tax structure, the final rates set by politicians could be very different – and probably much higher – than what was advertised during the enabling ballot campaign.

Bait and switch isn’t an uncommon tactic when it comes to income tax impositions. A low initial rate is advertised, but when “conditions” suddenly require more revenue, politicians jack up the rates. And a progressive tax allows the rates to be jacked up on some more than others – and no, not on just the rich: 31 of the 34 progressive tax states tax $50,000 at a higher marginal rate than Illinois will in 2015.

Obviously the final rates matter quite a bit to individual taxpayers, who are facing top marginal rates of 11 percent under one plan currently being circulated in Illinois.

But it also interjects a lot of uncertainty for the business community. Refer back to the amendment text above – the corporate income tax rate can be as high as the average of the highest and lowest personal rates multiplied by a factor of 1.6 (8 to 5 ratio).

Let’s say the top personal rate is 11 percent, and the bottom rate is 5 percent. Averaged and imposed at the maximum ratio, the corporate rate would be 12.8 percent – a significant increase compared to the current corporate rate of 9.5 percent, not to mention the would-be highest in the nation.

But let’s say the top personal rate is 11 percent and the bottom rate is 0 percent. Averaged and imposed at the maximum ratio, the corporate rate would be 8.8 percent – a slight decrease compared with the current rate, although still higher than the pre-2011 tax hike rate of 7.3 percent.

The proponents of a progressive personal income tax want to increase revenue for the state. That much is clear. Individual taxpayers will bear the cost. But it isn’t clear about proponents’ intentions for the business community – do they think corporations should pay more or less in taxes? And if the answer is less, are they comfortable with financing it via higher taxes on middle-income families? And why are they willing to keep a flat tax for businesses but impose a progressive structure on private individuals?

One of the many advantages of a flat tax is simplicity. As I wrote for the Chicago Tribune back in 2010:

A flat tax is simple to compute and helps keep government accountable. You can easily calculate what 3 percent of your wages equals. Multiple tax brackets muddy the waters, and it’s hard to know if you’re getting good value for the money when you don’t know how much goes to government in the first place.

During the last tax hike fight, everyone knew what was at stake. Gov. Pat Quinn wanted a 33 percent tax hike by taking the rate from 3 percent to 4 percent – although he later signed a 67 percent hike taking the rate from 3 to 5 percent.

The takeaway is that you’ll never quite know what you’’re going to get once a progressive tax structure is introduced. Small adjustments in just one of the brackets could equal big changes in actual taxes owed.

Learn more about the disadvantages of a progressive income tax.