Lawmakers crack open Pandora’s box with graduated income tax amendment
Ultimately, the state’s spending and debt habits mean Pritzker’s plan will be a bridge to higher taxes for the middle class. Pritzker and state lawmakers should instead pursue sensible spending reforms that don’t require declaring open season on Illinois taxpayers.
The cornerstone of J.B. Pritzker’s political career has arrived. A graduated income tax is moving.
Pritzker heralded new language for a constitutional amendment April 10. Barring any unlikely changes, this will be what the governor rides until the end of May. It adds 26 words to the Illinois Constitution and eliminates 43.
Those few words mean a lot. Together, they would be the biggest change to Illinois taxation since the state adopted an income tax in 1969. And their inartful phrasing means Illinoisans have good reason to be frightened.
Those concerned about Pritzker’s progressive tax have been stating a simple message for months: It is a bridge to higher taxes on the middle class. Pritzker’s new wording – two elements in particular – only confirms that fear.
One applies to individuals. The other to businesses.
First, the individuals. The Illinois Constitution currently bars the state from imposing more than one type of tax on income. But Pritzker’s amendment scraps that language, allowing Illinoisans to be taxed more than once on the same dollar earned.
If Pritzker’s amendment becomes part of the Illinois Constitution, the state could adopt an extra income tax surcharge dedicated entirely to pensions, for example. A quarter of the state budget is currently consumed by pension costs, and a 2018 report published by the Federal Reserve Bank of Chicago suggested a 1 percent statewide property tax to pay for soaring pension liabilities. Pritzker pitched new pension obligation bonds to investors earlier this year.
Specifically, Pritzker’s amendment deletes these lines from the Illinois Constitution: “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.”
Pritzker’s amendment eliminates that language and adds this: “The General Assembly shall provide by law for the rate or rates of any tax on or measured by income imposed by the state.”
Todd Maisch, president and CEO of the Illinois Chamber of Commerce, raised concerns about this language in committee testimony. “If somebody decides there’s a need for another income tax increase, I think it’s going to look a lot like a ‘special assessment for public safety.’ It’s going to be a ‘special tax dedicated to education.’ It’s going to go under that guise,” Maisch said.
“It also allows [for] taxation of certain kinds of income a second or third time,” he added. Maisch referenced carried interest and agriculture as two examples of income that could be subject to special additional taxation should this protection be eliminated.
Not only does Pritzker’s amendment leave Illinoisans vulnerable to additional income taxes, it also lacks protection for businesses seeking to invest in Illinois talent.
In fact, the amendment would allow lawmakers to impose the nation’s highest corporate income tax rate.
The Illinois Constitution currently caps the corporate income tax rate at eight-fifths of the individual income tax rate. Illinois’ personal income tax rate is 4.95%, and the corporate income tax rate is 7%, but lawmakers could legally hike that rate up to 7.92%.
The cap remains in place under Pritzker’s amendment with one very important change: it would apply to the highest individual income tax rate. Under the governor’s “fair tax” proposal, that rate is 7.95%.
So given Pritzker’s top personal income tax rate, lawmakers could pass a corporate income tax rate of up to 12.72%. And adding the state’s Personal Property Replacement Tax would bring Illinois’ effective corporate income tax rate to a whopping 15.22%.
The highest marginal corporate income tax rate of any state in the nation is 12% in Iowa, according to the Tax Foundation. And that’s scheduled to drop to 9.8% by 2021.
Ultimately, the state’s spending and debt habits mean Pritzker’s plan will be a bridge to higher taxes for the middle class. Pritzker and state lawmakers should instead pursue sensible spending reforms that don’t require declaring open season on Illinois taxpayers.