Pritzker’s ‘fair tax’ makes city income taxes more likely

Pritzker’s ‘fair tax’ makes city income taxes more likely

If the Illinois Constitution is amended to allow different income tax rates, expect cities to try to impose their own income taxes.

The Illinois Constitution currently allows larger cities to impose local income taxes, with state lawmakers’ approval – but no cities in Illinois currently collect income taxes.

That could change if voters approve the progressive tax constitutional amendment Nov. 3.

City income taxes now must be imposed on all taxpayers at the same rate. Angering every voter in Chicago, Peoria or Springfield is too great a political risk and the likely reason no Illinois city has an income tax.

When the state has raised income taxes on everyone, there have been political consequences. After lawmakers imposed the 2017 tax hike, about 30% of the seats had new occupants when the legislature returned.

But the ability to split off taxpayers from the protection of the herd is the heart of the constitutional amendment before voters. It ends the flat income tax guaranteed by the Illinois Constitution and lets lawmakers tax smaller groups whatever rates they wish, avoiding the large voter backlash from taxing everyone.

The “fair tax” change would allow the same divide and conquer dynamic at the city level. Certain income groups would be declared “rich” to get the progressive tax started, then later the hungry politicians would pick off more and more of the herd.

Amendment lacks protection against municipal income taxes

Initially state lawmakers included language in the amendment proposal that prohibited local income taxes. That changed by the time they approved the ballot question, and the current progressive tax amendment offers no protection against local income tax hikes.

The original constitutional amendment introduced in the Illinois Senate stated, “No government other than the State may impose a tax on or measured by income.”

Lawmakers removed that protection. The language that passed the House and Senate merely states, “The General Assembly shall provide by law for the rate or rates of any tax on or measured by income imposed by the State.”

Article VII of the Illinois Constitution already allows home rule units of government – which include almost all municipalities over 25,000 people and can include counties with a chief executive officer – to impose a local income tax with the approval of the General Assembly. If voters approve the removal of the state constitution’s requirement that a “tax on or measured by income … be at a non-graduated rate,” home rule units of government would have the same incentives as the state to seek more and more tax revenue by hiking taxes on one group of taxpayers at a time.

A progressive tax will tempt Illinois cities hungry for more revenue

Many Illinois cities have been under fiscal strain for years, with mounting pension debt putting pressure on budgets. Add to that the COVID-19 economic crisis with plummeting sales tax collections and other declines in revenues, and many municipal leaders are seeking more funding sources. An Illinois Municipal League survey revealed 87% of responding municipalities face 20-30% revenue shortfalls in 2020 compared with 2019. 

Take Chicago, for example. Mayor Lori Lightfoot has estimated that, due in part to the revenue shortage and economic fallout from the COVID-19 pandemic, the Chicago city budget deficit is nearly $800 million for the current fiscal year, and $1.2 billion for the 2021 fiscal year. While revenues are down, pension costs are going up: rising $134.1 million in 2021 over what the city paid in 2020, according to the city’s budget forecast.

The mayor would not rule out a property tax hike, but said it was her last option to raise more revenue, WTTW reported. Widespread resistance to further property tax hikes on the heels of Chicago’s massive $543 million property tax hike passed in 2015 could make a progressive tax on income more appealing to city leaders.

Progressive organizations have already called for a city income tax as a way to fund more services. The Action Center on Race & the Economy, or ACRE, proposed a 3.5% Chicago city income tax on households with income over $100,000, according to Chicago Magazine. This proposed tax would apply to city residents and to commuters who live outside Chicago.

Others see a tax on income as a possible way to keep heavily indebted Chicago from drowning in red ink. Journalist Ed Zotti said in the Chicago Sun-Times that a city income tax might be the best of all the bad options to shore up Chicago’s troubled finances.

The mayor and Chicago-based state lawmakers have already asked the General Assembly for progressive taxes on real estate transfers. State Sen. Ram Villivalam, D-Chicago, filed a bill in February that would impose higher rates of taxes on sales of higher-value property in Chicago. Asking the General Assembly for permission to impose a progressive tax on income earned in the city would not be a giant leap from this.

Municipal income taxes could spread to smaller cities as well

The appeal of a city income tax would not necessarily be limited to Chicago politicians.

Even before the COVID-19-related economic crisis and shutdown, Peoria had cut positions in its police force and fire department and imposed a public safety pension fee to fill a hole in its budget caused by mounting police and fire pension costs. In 2020, Peoria city leaders debated throughout spring and summer how to close $10 million of the city’s $50 million COVID-19-related budget hole. In September, the city council voted to decommission two fire engines, which, at the time was expected to result in the elimination of 22 fire department positions. A recently negotiated settlement of the firefighters’ union’s unfair labor practices lawsuit could keep one of the engines in service into 2021.

In Springfield, the budget director warned in 2019 the city needs nearly $270 million more in additional revenue during the next 20 years to pay for its escalating pension costs. Springfield now has a COVID-19-related $8 million-$11 million shortfall. Springfield Mayor Jim Langfelder said he opposes tax hikes, but balancing the budget will be a challenge with pension obligations restricting the city’s room to maneuver.

Like Chicago, Peoria and Springfield, many other Illinois municipalities – such as Alton, Kankakee and Danville – face severe fiscal problems with few ways to balance their budgets other than service reductions or tax hikes. In an era of increasing pension costs and a COVID-19 economic crisis, many local leaders of cash-strapped municipalities might find progressive city income taxes hard to resist.

The General Assembly has not yet approved a local income tax, but that could change. If the Illinois Constitution’s flat tax protection were removed, local governments would be able to target specific income brackets for taxation – one at a time – which could make such a tax politically easier for state lawmakers to support.

Adding city income taxes to Illinoisans’ already high tax burden would damage struggling municipalities by dampening economic growth and job creation, driving out residents and making it even harder for small businesses to recover.

Illinoisans should be aware: Stripping the Illinois Constitution of its flat tax protection could have effects far beyond the tax hikes on the immediate horizon.

Want more? Get stories like this delivered straight to your inbox.

Thank you, we'll keep you informed!