Progressive income tax study guide

Orphe Divounguy

Chief Economist

Orphe Divounguy

Adam Schuster

Senior Director of Budget and Tax Research

Adam Schuster

Bryce Hill

Senior Research Analyst

Bryce Hill
August 27, 2020

Progressive income tax study guide

Illinois Gov. J.B. Pritzker calls it the “fair tax.” Opponents say it’s a “blank check” for irresponsible spending. Here’s what you need to know.

“Trust us.”

That’s the message from state lawmakers asking voters to scrap the Illinois Constitution’s flat income tax protections and give them the power to set “fair tax” rates. They want that trust so badly that Illinois Gov. J.B. Pritzker has so far put $56.5 million of his own money into the campaign to sell the tax to voters ahead of the Nov. 3 election.

But they are asking for trust at a time when federal corruption probes have implicated Illinois House Speaker Mike Madigan, when four of the tax’s main backers face corruption prosecutions and when Pritzker himself is under investigation for dodging property taxes.

Besides plenty of evidence that state leaders have the fiscal restraint of inebriated mariners on hiatus – 20 years of state budget deficits, the nation’s worst pension debt and a near-junk credit rating – original research by the Illinois Policy Institute shows replacing Illinois’ flat tax with a progressive tax system would cause deep hurt to already overburdened taxpayers and suffering for a state economy attempting to recover.

Specifically:

  • Removing the constitutional flat tax protection would lead to large tax hikes on middle-class Illinoisans while saving low-income taxpayers barely enough for a fast food meal. It also would allow retirees to start being taxed and allow for double taxation through “surcharges.”
  • Small businesses drive Illinois’ economy and job creation. The “fair tax” would impose tax hikes of up to 47% on over 100,000 small businesses just as they begin to bounce back from the COVID-19 economic impacts.
  • The initial tax rates lawmakers passed in case they get voters’ trust would generate a fraction of what Pritzker needs to make good on how he promised to spend the new tax revenue. Only a tiny fraction of the tax is targeted toward the state’s biggest fiscal threat: pension debt. Whether by irresponsible spending or growing budget demands, the new tax will not be enough unless state leaders break the promise that “97% of taxpayers will see some tax relief.”
  • In the only state to experiment with swapping a flat income tax for a progressive income tax in the past 30 years, Connecticut, state lawmakers made promises similar to those being made by Illinois lawmakers today. But Connecticut’s middle class ultimately saw higher income tax rates, higher property tax bills and more debt while the state’s poverty rate climbed.

Here is what voters need to know before deciding whether to trust in the “fair tax” and the greater power it would give state lawmakers.

Overview

What Illinoisans need to know about the progressive income tax
Answers to frequently asked questions regarding Pritzker’s “fair tax” proposal, including how the vote works, proposed income tax rates and its effect on property taxes.

Pritzker fact check: Do most other states really have a ‘fair tax’?
A close look at Pritzker’s claim that most states have a “fair tax” that soaks the rich shows 18 of 32 states with progressive taxes would charge the average Illinoisan the same rate as a billionaire.

Reality check on 5 false claims used to boost Pritzker’s ‘fair tax’
​​Breaking down the most common falsehoods used to garner support for a progressive income tax in Illinois.

Tax growth: who will pay

Illinois treasurer says ‘fair tax’ makes retirement tax more likely
​​Progressive tax rates are a necessary first step to taxing retirement income, an idea state leaders keep advancing.

Pritzker ‘fair tax’ relief amounts to $6 for low-income Illinoisans
​​Those in the bottom 20% of income earners would average $6 in savings from a progressive tax while still shouldering a tax burden of nearly $1,800. That translates to Illinois taxing its low-income residents at the nation’s third-highest rate.

Illinois passed a record-breaking income tax hike 3 years ago. Here’s where the money went.​​Illinois state leaders hiked income taxes by nearly one-third in 2017. After taking an extra $5 billion from taxpayers, state finances have failed to improve.

Pritzker ‘fair tax’ would allow for double, triple taxation on every $1 earned
​​Eliminating the flat tax protection would allow state lawmakers, by a simple majority vote, to impose “surcharges” for pensions or other spending. Taxpayers could also be taxed two or three times on the same $1.

Lessons from other states

Every state with a progressive tax also taxes retirement income
All 32 states with a progressive income tax also impose some sort of tax on retirement income from 401(k)s, IRAs, Social Security and pension benefits.

How Connecticut’s ‘tax on the rich’ ended in middle-class tax hikes, lost jobs and more poverty
In the past 30 years, just one U.S. state has switched to a progressive income tax: Connecticut. The results were disastrous. And they should caution Illinoisans.

California’s ‘fair tax’ hike spurred taxpayer exodus, hurt middle class and went mostly to pensions
California’s progressive income tax has triggered a wealth exodus, yielded much less revenue than expected and lasted longer than promised, according to Stanford University research.

Progressive income taxes don’t reduce income inequality
Pritzker claims a “fair tax” lets a state play Robin Hood, taking from the rich to give to the poor. The reality is states with progressive taxes have a wider income gap than states with a flat or no income tax.

Effects on the Illinois exodus

Illinois saw nation’s worst population loss during the decade
The 2010s were a lost decade for Illinois, losing more people than any other state and enough to populate Naperville, its third-largest city. Adding taxes, especially on job creators, would give more people a reason to leave.

​​Blame Illinois exodus on jobs, housing, tax policy
​​Illinois saw 850,000 people move to other states during the past decade, in search of better job opportunities, as well as housing and taxes they could afford. The loss was driven by prime working-age Illinoisans, creating a bleaker future and making the state less diverse.

Middle-class tax hikes

Pritzker ‘fair tax’ hike would depress jobs growth, raise taxes on middle class
Independent scoring shows the “fair tax” will fail to raise as much as Pritzker claims, inevitably leading to middle-class tax hikes while discouraging investment in jobs.

​​Without pension reform, progressive income tax amendment guarantees tax hikes on Illinois’ middle class
Even using the most generous assumptions regarding natural growth in Illinois’ income tax revenue, income tax rates would have to be raised on everyone in order to pay down the unfunded pension liability within the next 40 years. This also assumes every dime of additional revenue goes to pensions and would require much higher tax rates than currently proposed.

Pritzker’s $3.4B income tax hike can fund less than 4 months of state pension costs
Without reform, Illinois’ pension problem will continue to force tax hikes while crowding out spending on the core services residents need most.

Revenue claims and political promises

Illinois personal income tax revenue could fall up to $6.6 billion from COVID-19 lockdown
Income taxes are a volatile revenue source, which is why the COVID-19 restrictions and mass unemployment are expected to drop Illinois’ revenues by up to $6.6 billion. A progressive tax puts greater reliance on smaller segments of income, increasing the state’s fiscal vulnerability – especially during economic downturns.

​​Motivated math: Pritzker ‘fair tax’ numbers don’t add up
​​Pritzker claims progressive tax rates will generate $3.4 billion in new state revenue, but his revenue projections overstate how much a progressive income tax hike would actually bring in by $1 billion to $2 billion.

​​5 broken tax promises show why Illinois voters distrust Pritzker’s ‘fair tax’​​
Illinois politicians have a history of broken promises about how they tax and spend residents’ money.

Effects on business, jobs

Progressive income tax hike could be up to 47% for Illinois small businesses
​​Illinois’ small businesses create 60% of jobs in the state. The “fair tax” opens the door to a tax hike up to 47% on over 100,000 small businesses, as they work to recover from the COVID-19 economic downturn.

As nation celebrates small businesses, Illinois considers taxing them more
S-corps and partnerships are the most common filing status for small businesses. The progressive tax structure passed by the General Assembly could mean that nearly 112,000 such entities in Illinois – 30% of them – pay more.

Pritzker progressive tax amendment allows for nation’s highest tax on business income
​​Illinois Gov. J.B. Pritzker’s amendment would allow Illinois to impose an effective corporate income tax rate of up to 15.28% – the nation’s highest by far.

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