Illinois progressive-tax proposal is a middle-class tax hike in disguise

Illinois progressive-tax proposal is a middle-class tax hike in disguise

A progressive tax would give Illinois politicians carte blanche to raise rates, which would end up sticking middle-class taxpayers with rates originally intended for “the rich” – all while chasing still more residents and businesses out of the state.

Illinois Democrats hope to raise nearly $2 billion in new taxes by swapping out Illinois’ flat tax for a progressive tax. State Rep. Lou Lang’s proposal would increase rates to as high as 9.75 percent for top earners – considerably higher than today’s rate of 3.75 percent for all taxpayers. But Lang’s proposed rates aren’t set in stone – if politicians pass a progressive tax, they’ll be able to enact any rates they please.

Tax-hike proponents claim this tax increase would affect only “the rich,” and that Illinois should follow the lead of other states that use a progressive-tax system. So what has happened in other states? Taxes sold as increases on “the rich” often end up hitting the middle class.

The Illinois Constitution currently requires a flat income tax, meaning the state taxes all personal income at the same rate. Under this system, those who make more, pay more. For example, someone who earns $50,000 a year will pay $1,875 in state income taxes. Someone who earns $500,000 a year will pay $18,750.

The two-step, progressive-tax plan underway in Springfield would:

  • Change the Illinois Constitution so that taxpayers pay the state under a progressive system, meaning different incomes fall into different brackets taxed at different rates
  • Pass a law implementing new tax rates

The proposed constitutional amendment filed by state Rep. Christian Mitchell, D-Chicago, doesn’t include any rates, but merely provides that the state’s income tax “may be imposed by law,” and strikes the flat-rate requirement. This may be because it’s tougher to amend the constitution than it is for politicians to hike the rates by passing legislation. Changing the constitution requires voter approval; changing the rates would not. So what lawmakers essentially are doing is selling voters on one tax plan while asking voters for the authority to set any rates they want – which could be the rates provided in Lang’s bill, or any other rates.

The politicians proposing the tax increase have already said they do not want the constitutional amendment to restrict their “nimbleness” to change tax rates. That nimbleness may spell tax increases for middle-class Illinoisans in the future.

Here’s how this scenario has played out elsewhere in the U.S.: When Missouri first introduced its progressive state income tax in 1931, only a few residents earned more than the $9,000 threshold for the 4 percent top tax rate in effect at the time. That $9,000 amount in 1931 is worth $141,000 today. Even if Missouri’s top rate kicked in at that income level, many more residents would find themselves in the top income-tax bracket because wages have increased faster than inflation. But Missouri’s top tax rate doesn’t kick in at $141,000. Even though the rate was increased to 6 percent, the top tax bracket starts at the same $9,000 in effect when it was introduced in 1931.

When California introduced its income tax in 1935, residents paid a 9 percent rate on income over $50,000. If the state had adjusted for inflation, then Californians would start paying 9 percent only after making $870,000. Instead, the state’s 9.3 percent rate today starts at just $51,530.

And consider the federal income tax, which was sold as a tax on the wealthy. At its introduction in 1913, the top bracket of 7 percent kicked in on incomes over $500,000, worth over $12 million in today’s money. Many of the tax’s supporters hailed from Southern and Western states and believed the tax would only affect wealthy Northeasterners. But the 16th Amendment allowing the federal income tax left rates up to legislators, and within five years Congress had increased the top rate to 77 percent. Today the top rate stands at 39.6 percent.

Federal lawmakers used the crisis of World War I as justification for the tax increase, but top rates stayed either above or close to their wartime levels until the 1980s. And federal income-tax rates have never fallen to anywhere close to their brief prewar levels.

So what’s the lesson for Illinois? Yes, the state faces a financial crisis. The state has a $111 billion pension shortfall, and multiple credit downgrades have left Illinois’ credit rating just three steps above junk. The state will benefit more from reforms that grow gross domestic product than tax increases that will likely lead more Illinoisans to leave the state and further reduce revenue in the long run. And a progressive tax takes away the perceived need for reform. If lawmakers have the ability to expand the progressive tax rates to the middle class and raise more money whenever they want, then they are less likely to make difficult – but crucial – decisions to rein in spending.

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