* From Gov. Pritzker’s budget address…
Our second option is to raise revenue with our current regressive flat income tax system and impose more flat taxes which fall disproportionately on the working poor and the middle class. This option could require imposing sales taxes on services, implementing a retirement tax, or raising the income tax overall by around 20%. Or all of the above. For a family earning $100,000, that means paying almost a thousand dollars more in income taxes, and their property taxes will continue their upward march as they always have.
* The BGA rated these claims “Mostly False”…
But experts told us that extending the [sales] tax to cover an array of services, such as landscaping, hair styling and laundry, could not only bring in more revenue but help make the sales tax less regressive and benefit those with less disposable income by providing a cushion to lower rates overall.
“As income rises, the share of your expenditures that are spent on services generally rises,” said David Merriman, an economist who heads the Fiscal Futures Project at the University of Illinois. […]
Pritzker would be correct about harming the poor and middle class if Illinois simply did away with the retirement income break in its entirety. But that’s not how it’s done by most states.
In general, states that tax retirement income nonetheless shield some of it from taxation. That’s the case in Indiana and Michigan, which, like Illinois, have flat-rate income taxes. Both neighboring states exempt Social Security income, and Michigan also allows thousands of dollars in deductions on pension and annuity benefits. […]
In his budget speech, Pritzker held out his graduated tax push as the only way to inject more fairness into a tax system currently charging everyone at the same rate. But during last year’s primary campaign, Pritzker himself floated a revenue-raising plan to make the single-rate system more progressive that would require legislative approval but no constitutional change.
Lots of woulda, coulda, shoulda in there.
* This is what the governor’s office sent to the BGA…
• Governor Pritzker is advocating to change the tax system because the system of flat taxes in place today as currently structured is regressive. That hurts working people more than it hurts the wealthy. Illinois taxes are flat, so raising taxes within the current system would mean that the burden falls disproportionately on working people. Our goal is to finally put a comprehensive graduated income tax system in place.
• By its nature, today’s existing flat taxes are regressive because all taxpayers are paying the same rate, regardless of how much they earn.
• The middle class and those striving to get there in Illinois pay more of the percentage of their income in taxes than upper class Illinoisans. In fact, according to ITEP, Illinois ranks as the 8th least equitable system in the country: https://itep.org/whopays/
• Without a fair tax, low-income families pay a higher percentage of their income toward taxes. Overall, taking into account all taxes Illinois families pay, the lowest 20% of income-earners, or those making less than $21,800 a year, pay 14.4% of their income toward taxes. The top 1%, or those earning more than $537,800, pay only 7.4% of their income toward taxes.
• This becomes clear when you look at families’ entire tax burden.
• Property taxes: In Illinois, the lowest 20% of income-earners, or those making less than $21,800 a year, pay 6% of their income toward property taxes. The top 1%, or those earning more than $537,400 a year, pay only 2.1% of their income in property taxes.
o Additionally, Illinois has some of the highest property taxes in the nation and studies have found that homeowners in low income areas are often paying the highest rates:https://www.chicagotribune.com/news/watchdog/taxdivide/
• Sales and excise taxes: In Illinois, the lowest 20% of income earners, or those making less than $21,800 a year, pay 4.8% of their income toward sales and excuse taxes. The top 1%, or those earning more than $537,400, pay only .8% of their income in sales and excise taxes.
• Between a flat income tax and property taxes, the tax burden already disproportionately falls on low and middle incomeIllinoisans.
• By its nature, a sales tax on services is also regressive because all taxpayers are paying the same rate, regardless of how much they earn. Raising taxes on services instead of a fair income tax would disproportionately impact the middle class and lower income families. Like the governor said, he does not support taxes that disproportionately impact low and middle income residents.
o States that have expanded their sales tax base, like Wisconsin that you mentioned, already have a fair tax system so their tax burden is already more equitable than Illinois.
▪ Wisconsin ranks 34th least equitable on the ITEP study cited above, compared to Illinois at 8th least equitable. (A higher number means a state is more equitable.)
• In order to tax retirement income in a progressive way, Illinois would need to amend the constitution to allow for a fair income tax. The governor is not pursuing taxing retirement income, but he is pursuing a fair income tax.
• During the campaign, the governor did not propose raising the flat tax with exemptions. He pointed to a plan already introduced by Sen. Don Harmon that attempts to create a progressive structure in a temporary way.
o However, amending the constitution to allow for a fair income tax is a much more comprehensive and permanent approach that would not be subject to a court challenge, which could not only delay implementation but means that it may never be enacted. This is why the governor is focused on this effort and is working with the General Assembly for a vote this session.
o What the governor proposed in his budget was a realistic long term solution to transform state finances and it could take effect in 18 months.
• Additionally, a fair income tax helps combat rising income inequality. For the past several decades, virtually all income growth has been made at the top income levels. A flat tax fails to capture that growth because the same rate applies to high and low income earners. While some states have taxcodes designed to tap into the wealth held by the top 1 percent, Illinois’ unfair flat tax rate continues to rely on taxes from those who have the least wealth in the state. A Fair Income Tax with lower rates for lower incomes and higher rates for higher incomes is needed to bring about tax fairness in Illinois and long-term, structural reform that produces stable and sustainable revenues and finally gets our fiscal house in order.
• A fair income tax also eases local property tax burdens and allows Illinois to invest more state dollars in public education. Increasing the state contribution to local governments and school districts eases the burden of local property taxes. According to the most recent data available from the National Center for Education Statistics, Illinois contributed just 24.9 percent of the total cost of public education in the 2014-2015 school year. Nationally, the average state contribution to elementary and secondary education is 46.6 percent.
o Neighboring states with a fair income tax system contribute a greater share of the overall cost of public education than Illinois:
• Iowa contributes 53.5 percent of the total cost to funding public education,
• Kentucky contributes 54.9 percent of the total cost to funding public education,
• Missouri contributes 32.5 percent of the total cost to funding public education, and
• Wisconsin contributes 45.9 percent of the total cost to funding public education.
• Finally, Governor Pritzker will work with the legislature to advance a fair tax amendment this session. As the discussion on the amendment moves forward, the rate structure will be negotiated with the General Assembly before a vote takes place so the public has a full and transparent understanding of the way forward.
The inevitable court challenges of high exemptions for retirees and graduated exemptions for everyone else are the administration’s best points. Tax hikes like those could be tied up in court for years and years.