Tax increase in sheep's clothing
Next year's election campaign will not just be about electing a new governor but also passing a state constitutional amendment allowing progressive state income tax rates.
With not nearly as much money coming in to the treasury, state officials are laying the groundwork for a big tax increase by characterizing it as a tax decrease for most.
Just last week, various state officials were touting plans for an amendment to the Illinois Constitution that would do away with a flat state income tax and replace it with what they call a progressive state income tax, which would place escalating rates of taxation on escalating levels of income.
Supporters characterize it as the only fair approach — the more money you make, the more you pay — and note that 34 states have progressive state income taxes. If other states have a progressive income tax, they say, it's an example Illinois should follow. Of course, they ignore the nine states that don't have a state income tax at all, places like Texas and Florida. Nothing to see there, move along.
The notion that the more you earn, the more you pay has appeal.
But the problem with that theory is two-fold. First, it is already true in Illinois that those who make twice as much income pay twice as much tax. Moreover, in reality, states with progressive income taxes start levying their higher rates on lower levels of income. More on that in a moment.
Top state Democrats as well as local legislators who include state Rep. Naomi Jakobsson of Urbana and state Sen. Michael Frerichs of Champaign already have embraced plans for a progressive income tax, and it's almost certain the proposal will be a major issue in next year's gubernatorial campaign.
The plan for a constitutional amendment is simple, to the point of being dangerously vague. Voters would be asked if they approve replacing the current flat tax mandate with progressive rates. There will be no specifics as to the progressive rates or at what levels of income they would be imposed. That would be addressed later by our money-hungry state legislators.
But, generally speaking, the Democrats who control Illinois (Republicans are politically irrelevant) have embraced a proposal put out by the liberal Center for Tax and Budget Accountability.
Center director Ralph Martire has estimated that Illinois could collect an additional $2.4 billion a year by increasing state income taxes on those with incomes in excess of $150,000 a year. Martire's plan calls for escalating rates, 8.5 per cent on $150,000 to $200,000, 9.5 per cent on $200,000 to $300,000, all the way up to 11 percent on incomes over $1 million.
His sales pitch is simple — let the state tax the rich and give the rest a break.
But there's a problem with those numbers. They're not written in stone. Legislators can do what they wish with them, and legislators in other states with progressive rates set taxes at high levels on low incomes.
A report by Martire's budget center noted the different practices by different states, fairly drooling over Iowa's progressive rates.
"If Illinois were to adopt the same graduated income tax rate structure as Iowa, Illinois would raise $6.3 billion more in revenue than it does from its current five percent flat rate, while 54 percent — over half— of all taxpayers would pay less in state income taxes," the report stated.
That might sound good to some people, but Iowa has 9 rates, the highest being 8.98 percent on incomes in excess of $63,000 for married couples jointly filing. It levies rates of 4.5 percent on income between $5,600 and $12,663 and 6.2 percent on income between $12,664 and $21,105.
Missouri has 10 rates, the highest being 6 percent on incomes in excess of $9,000. Wisconsin has five rates, the highest being 7.75 percent for the biggest earners. But married couples earning between $14,090 and $28,180 pay 6.15 percent and the rate is 6.5 percent on incomes between $28,181 and $211,330.
Almost all those numbers are higher than Illinois' 5 percent flat tax. Why is that? Legislators go where the money is, and the greatest source of tax revenue is garnered from middle-class families who don't feel nearly as rich as government officials consider them to be.
There's another problem with the progressive plan, the so-called tax break for 94 percent of Illinois taxpayers.
In January 2011, state legislators approved a 67 percent state income tax increase, from 3 percent to 5 percent. Part of that increase, 1.25 percentage points, was supposed to be temporary, expiring Jan. 1, 2015. That promise to allow that state income tax to fall back to 3.75 percent was then and is now a blatant misrepresentation of legislators' intentions.
They won't allow the state income tax to fall back to 3.75 percent because they want the money it generates. So they're proposing what purports to be a trade — swapping the flat tax for the progressive tax in the November 2014 election with the promise of lower state taxes for 94 percent of filers.
It's a great misdirection plan, theoretically possible because there are no numbers associated with the amendment proposal. But Martire's tax plan shows a tax rate of "zero or below" up to $5,000 in income and rates of 5 percent up to $100,000 and 7.5 percent and upward from there. So, with the exception of those below $5,000, nobody will be paying less than 5 percent.
If the so-called temporary increase was allowed to expire as promised, nobody would be paying 5 percent. Instead, the rate for all earners would be 3.75 percent.
The Center for Tax and Budget Accountability gets around that problem by stating that taxpayers won't get tax rate decreases but "effective tax rate decreases," after deductions and credits.
Obviously, there's a big difference, and it's that difference between rhetoric and reality that causes us to advise voters to be skeptical of the progressive income tax proposal. The elected officials touting it, as usual, are being duplicitous. They see it as a tool to vastly increase state income tax revenue, and they're selling it as a means of giving most taxpayers a break. It will increase revenue but, as the numbers show, the purported break is a different story altogether.