* Gov. JB Pritzker has used variations on the word “stability” a lot since taking office, and he has often cited his graduated income tax proposal as part of that road to what I would concur is much-needed stability for the state…
Pritzker is expecting the state to take in $3.4 billion in additional revenue through this system and says it will provide a climate of stability for skittish business owners.
“The most important thing we are accomplishing is stabilizing the finances of the state,” Pritzker said.
But does his graduated income tax proposal do that? Revenues from the flat tax, some contend, are more stable and predictable. But why?
* Well, the Civic Federation took a look at the latest information released by Gov. Pritzker’s office and found that it contains a “heavy reliance on volatile high incomes.” From the report…
While the top income band [$500,001 or more] had the highest growth [8.45 percent average annual growth], it also swung from a maximum of over 39% in 2012 to loss of almost 18% the following year. The reason for this volatility is that upper incomes depend more on investment and business income, which varies with stock market performance and the business cycle. Lower income ranges, which rely more heavily on labor income, are more stable from year to year. In a recent analysis of Illinois’ economic outlook, Moody’s Analytics pointed to the State’s current above-average reliance on non-wage income such as dividends and interest and its vulnerability to a downturn in the stock market.
Upper-income volatility has important implications for the Governor’s plan, which concentrates its tax increases on the highest earners. While a top-heavy tax structure will lead to higher revenues on average, it will also increase their variance, as explained in a 2014 study by the Commission on Government Forecasting and Accountability. As the General Assembly weighs the Governor’s proposal it should consider the impact on revenue volatility and make appropriate plans, such as building up a rainy day fund.
That COGFA report referenced above is here.