Oh, the irony: back in 2015, before Trumpism, long before the Illinois General Assembly placed on this November’s ballot a measure to enable a graduated income tax, I supported such a tax at my Patheos blog. I called it “the Jane Tax Plan” and advocated for lots of tax brackets, with moderate increases from one to the next, so that there was never a point at which a jump from one bracket to the next felt punitive. Separately, I wrote that, with respect to graduated income tax rates, ” is that it is most reasonable and appropriate to ask those who are most able to, to pay a disproportionate share of the total income tax burden.”
Which means that I might appear, were I to say, “vote no on the fair tax!” to be a hypocrite.
In reality, well, it’s a mess.
In principle, a graduated income tax is reasonable and appropriate, and, what’s more, it’s not appropriate for the state’s constitution to spell out what sorts of taxes are and aren’t permitted and, in particular, to mandate that any income tax be flat across all income levels.
In reality, I have serious doubts as to whether Illinois politicians can handle the responsibility that comes with this increased power.
It is, after all, well-established that states that succumb to temptation, end up with marginal tax rates on higher income levels so high that, first, they drive residents away, and, second, they are highly susceptible to swings in revenue, as the highest earners’ income fluctuates so much from year to year (bonuses, sales of stocks, etc.). And the fact that the tax rates stay low(er) for low(er) earners creates a mindset that the possible tax revenue from higher earners is “free” money for the legislators’ spending wishes.
Of course, plenty of states manage to be responsible about their tax-rate-setting abilities. But I simply don’t believe that Illinois is.
And with that in mind, let’s look at the message of the ads in support of this amendment, via the website “Vote Yes for Fairness.”
In the first place, of course, the label “fair tax” is so loaded as to be itself untrustworthy. Why is a graduated income tax “fairer” than a flat tax? As it happens, until Pritzker began his campaign, another group was using the “fair tax” moniker for a type of tax that Pritzker would surely label extremely unfair: the swapping out of our existing national income tax and its replacement by a national consumption tax. The website FairTax.org is still active, with the organization Americans for Fair Taxation, and the left-leaning Tax Policy Center, in 2015, wrote “The Trouble with the Fair Tax,” which rejects the tax because it would disproportionately impact lower-income workers.
But beyond that, here are that site’ promises, which are the same as in ads everywhere:
- Bring our tax system up-to-date with the one used by a majority of states and the federal government
- Lift the burden off of lower and middle-income Illinoisans by asking the wealthiest to pay their fair share
- Require only individuals making over $250,000 a year to pay more
- Ensure at least 97% of Illinoisans see their taxes cut or remain the same
- Keep taxes the same or less for all small business owners making less than $250,000 a year in profit
- Generate additional revenue to fund our schools and lower the property tax burden
- Address Illinois’ structural budget deficit and put the state on the path toward fiscal sustainability
- Make sure essential workers aren’t forced to pay the same tax rate as millionaires and billionaires
Are these claims legitimate?
In the last session of the General Assembly, they passed a law which sets new tax rates if the voters approve the graduated tax amendment. These rates — which, incidentally, at the top level are not marginal tax rates at all but a jump to a new tax rate on all income — include a 0.05% drop in rate for taxpayers earning less than $100,000, allowing supporters to claim that their taxes will “drop” without acknowledging how little the drop will be. Then, for those with incomes of $250,000 or over, rates increase from 4.95% to 7.75%, and then further to 7.9% for millionaires. (Note that there is no differentiation between singles and couples.)
But these rates are not locked into the amendment. Once authorized, the legislature can make any changes it likes, so that making promises such as “only individuals making over $250,000 per year [would] pay more” is extremely misleading.
In addition, that a graduated tax system may be more common than a flat tax is one thing — but that’s only one characteristic of tax systems. As the Illinois Policy Institute reports, of those states with graduated income tax rates, it is actually a more common approach to use the marginal tax rate structure to reduce taxes on the lowest-income taxpayers than it is to “as the wealthiest to pay their fair share,” as the pro-amendment ads say. 10 states’ highest tax rate is for income of $20,000 or less. 8 states’ highest rates are at “middle class” income levels, between $30,000 – $73,710. Only 15 states’ highest tax brackets start at upper-middle income levels, ranging from Oregon’s $125,000 to New York’s $1,077,550 bracket. And, of course, if you’ve done the math, that leaves 18 states with flat rates.
Which means that “bring our tax system up-to-date with the one used by a majority of states and the federal government” is not really true. A tax system in which the “wealthy” pay higher rates than most others is, generously, used by only 30% of states, or only 22% if you discard the states with top brackets in the $100,000’s range (4 states).
What’s it boil down to?
It boils down to, really, the fact that the untrustworthiness of Gov. Pritzker, House Speaker Mike Madigan, and everyone promoting the graduated income tax using this rhetoric and these misleading claims, makes a proposal that would otherwise be reasonable and appropriate, highly suspect indeed.
Yes, Europeans provide more generous social insurance/social welfare benefits than in the US. They also understand that the population as a whole, not mythical millionaires and billionaires, must pay.
So, readers, I had every intention of keeping this space nonpartisan, so I’m going to say this in the most nonpartisanly-way possible: the just-released Pritzker tax plan (as linked to at CapitolFax.com) is terrible.
I should preface this by saying that I have no objection to graduated income taxes in principle. They give due recognition to the principle that everyone should pay into the system to at least some degree, but that it’s appropriate for those who can pay more without being deeply burdened, to do so. But at the same time, a graduated income tax should not be so imbalanced as to create a situation of excessive dependence on the wealthy for tax revenue, a dependence that puts the state at risk of substantial revenue volatility (as, for example, California experiences with half of its income tax revenue coming from people earning $500,000 or more, or 1% of its population), and simply creates a tendency to see government spending as “free money” rather than funded by taxing and spending decisions made in the best interests of state residents.
With respect to Illinois in particular, I have been distrustful of claims that our state will solve its financial woes with a graduated income tax because of the promises being made by Gov. Pritzker that only “people like me” (that is, the insanely wealthy) will be affected, and therefore no particular sacrifice is required on the part of any real people — and that’s on top of a generalized distrust of our elected officials. And no where in any of the discussion is there any statement made that there will be any efforts made to ensure that our tax money is spent wisely and as effectively as possible.
That being said, let’s look at the proposal, bearing in mind that the current Illinois personal income tax rate is 4.95% for all income above a personal exemption of $2,000.
Income up to $10,000 (27.2% of taxpayers) – 4.75%
Marginal rate up to $100,000 (58.9% of taxpayers) – 4.90%
Marginal rate up to $250,000 (11.1%) – 4.95%
Marginal rate up to $500,000 (1.9%) – 7.75%
Marginal rate up to $1,000,000 (0.6%) – 7.85%
Total rate for taxpayers with income above $1,000,000 – 7.95%.
So what do you notice?
In the first place, the incessant promises of “tax cuts for the middle class” may be literally true insofar as 4.90% is 0.05 percentage-points less than 4.95%. But these trivially-reduced rates demonstrate more than anything else the foolishness of having promised a “middle class tax cut” in the first place. It would have been far better for Pritzker to have acknowledged this (and better still not to have promised it); to hold to his campaign promise in this manner treats Illinoisians as fools, really. It also feels a bit like the game of pricing ending in .99, what with these brackets that are basically 5% and 8% but rely on residents thinking of 4.95% and 7.95% as meaningfully less than that, and having the multiple brackets with nearly identical tax rates makes no sense either.
In the second place, the proposal makes no differentiation between single and married taxpayers, imposing a substantial marriage penalty on upper middle-class earners.
And in the third place, the “millionaires’ tax” is astonishing. Here’s the math: a household with $1,000,000 in earnings would pay $70,935 in Illinois taxes. A household with $1,000,001 in earnings would pay $79,500, or $8,565 more for a single dollar more in income. Yes, I know, world’s tiniest violin, etc., but it makes no sense. It seems to be a matter of proving that you’re serious about sticking it to the wealthy, perhaps with some notion that there is no such thing as being “just a little bit rich.” But as an actuary, it makes me question whether these people can do math, and it also reeks of hubris, that is, a conviction that Chicago(land) is so indispensable, its economy so strong, its quality of life and cultural institutions so irreplaceable, that its denizens cannot possible leave for greener pastures.
Or has Pritzker intentionally omitted single/married brackets and intentionally added the all-income tier so as to subsequently eliminate these to proclaim that he’s compromising?
Again, I’m not going to burst into a rage or start using ALL CAPS but here we are. Democrats hold not just a majority but a supermajority in the General Assembly so they can afford to lose the votes of a few of their members in swing districts worried about re-election, and there’s no reason not to think they’ll steamroll this through just as quickly as the minimum wage hike, then present voters with the amendment as practically a done-deal.
Image: https://media.defense.gov/2019/Feb/12/2002088973/-1/-1/0/181206-A-UM169-0001.JPG; https://www.dover.af.mil/News/Article/1755127/what-you-should-know-about-filing-2018-taxes/ (public domain/US gov)