Reality check on 5 false claims used to boost Pritzker’s ‘fair tax’

Reality check on 5 false claims used to boost Pritzker’s ‘fair tax’

With Illinois lawmakers on break, the governor’s team is trying to build support for a graduated state income tax. Unfortunately, they are building on a foundation of false claims.

The Illinois General Assembly may be on break, but Gov. J.B. Pritzker and his allies are hard at work trying to whip up support to scrap Illinois’ constitutionally protected flat income tax. Too bad those graduated income tax proponents are using false claims to do it.

Here are some of the most popular, and deceptive, spins:

Claim 1: It is just as difficult to raise taxes under a progressive tax as it is under a flat tax. 

Reality: It is easier to raise taxes under a progressive income tax than it is under a flat tax.  

A flat tax makes it far harder for politicians to raise taxes. After the 2017 tax hike, many of the politicians who voted for it were either forced to retire or voted out of office.

A progressive income tax allows politicians to divide and conquer. They can segment Illinoisans into small income groups and increase taxes on each, one at a time. They can hold taxes constant for the majority in any given year, while gradually raising taxes on everyone – one group at a time. This allows lawmakers to skirt backlash from voters

In the 32 states with progressive income taxes, 18 of them subject middle-class families to the highest tax rate.

Claim 2: We can fix inequality with this “fair tax.”

Reality: Income inequality is higher in progressive tax states, and the gap between rich and poor in these states has not been shrinking.

Not only is income inequality, measured by the Gini coefficient, higher in states with progressive income taxes, but progressive income tax states haven’t been any more effective at combatting rising inequality. The difference in income inequality between progressive and non-progressive income tax states remains unchanged compared with the past decade.

In Connecticut, the last state to enact a progressive income tax, poverty rates skyrocketed after enacting the tax while they were falling in most other states.

Because Pritzker is unwilling to consider structural reforms to the state’s cost drivers, the lowest income Illinoisans under his tax plan pay the greatest share of their income in state and local taxes.

Claim 3: A graduated income tax hike won’t harm the state’s economy. 

Reality: The vast body of peer-reviewed academic literature acknowledges the negative effects tax hikes and progressive income taxes have on the economy. 

While many organizations are claiming that the $3.4 billion tax increase will have no effect on the economy, there is unanimous consensus among academic experts that tax hikes harm the economy.

Everyone from Nobel Prize winners such as Edward Prescott to former chairs of the Council of Economic Advisors including Christina Romer in the Obama Administration, the Director of the Congressional Budget Office Douglas Holtz-Eakin, George W. Bush economic advisors Harvey Rosen and Greg Mankiw, whose textbooks are the most widely used in macroeconomics, agree. They say higher taxes hurt economic growth and that higher marginal tax rates reduce small business employment, the wages of their employees and firm growth. New studies are consistently confirming these results.

Even the left-leaning Tax Policy Center admits that in the long-run, “High marginal tax rates can discourage work, saving, investment and innovation, while specific tax preferences can affect the allocation of economic resources.” They also state that in the short-run, “Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse.”

To say that tax hikes don’t harm the economy is simply wrong. The governor’s $3.4 billion tax hike will hurt the economy.

There is also a broad consensus that the optimal income tax – i.e. the one that hurts the economy the least – is a flat tax. Even Emmanuel Saez, who endorses Elizabeth Warren, agrees optimal income taxes should be “progressive on average but not on the margin.” Our current flat tax accomplishes this goal because of the value of exemptions and deductions for lower-income tax filers.

As if more proof were needed to show that people respond to tax policy, Illinoisans need only look at the governor himself. Pritzker is currently under federal investigation for removing the toilets from his Gold Coast mansion in order to get $331,000 in property tax breaks. The governor also has been widely criticized for utilizing offshore trusts to avoid paying taxes on his multi-billion dollar fortune.

Claim 4: We need this tax to pay for education – or else.  

Reality: Despite billions in increased education funding each year, most of these funds have been diverted from classrooms to pay for pensions.

During the past 20 years, state education spending, adjusted for inflation, has increased by $5.4 billion annually. However, two-thirds of this increase has gone to pensions instead of to classrooms. Despite the syphoning of state education funds by pensions, Illinois still spends more per pupil than every Midwestern state except for North Dakota. Illinois’ spending yields below average educational outcomes. Without structural reforms, a progressive income tax will be a tax for pensions, not for school funding

Claim 5: The choice is simple, we either raise revenue through (1) the “fair tax,” (2) a flat tax increase for everyone or (3) enact spending cuts of 15% across the board.

Reality: This is a false choice. We can balance the budget and fund services without paying higher taxes.

We have been paying higher and higher taxes every year. Meanwhile, the fiscal condition of the state continues to deteriorate. New revenue can’t fix the state’s structural flaws.

Illinois leaders should learn from past mistakes, but Pritzker constantly presents a false choice to lawmakers and residents. The governor claims there are only two ways to close the state’s daunting $3 billion deficit: massive tax hikes or slashing core government services such as education, public safety and social services.

That’s not true. Another option exists: Illinois can make structural spending reforms to the core cost drivers of its overspending, protect essential services and reduce the tax burden on Illinois residents at the same time. The Illinois Policy Institute’s five-year plan, Budget Solutions 2020, could accomplish all three with commonsense reforms that have received bipartisan support in the past.

Structural spending reform would enable lawmakers to balance the state budget immediately. In fewer than five years, they could eliminate the state’s bill backlog and finance a deficit-neutral income tax cut. Contrary to the governor’s claims, this can be accomplished without cuts to services that provide value to Illinois residents.

Illinois can build a new reality that draws new residents, but political leaders first need to stop claiming they can tax their way to prosperity.

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