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Fair, graduated rate income tax would be a positive step forward for Illinois

    If given the choice, here’s betting you’d want elected officials in Springfield to enact policy initiatives by ignoring their guts and instead doing the research needed to suss out the right solutions, relying on best practices and evidence. The harder question is, if given the opportunity to have a say in one of the most crucial issues facing Illinois today, would you be willing to take that same reasoned approach and support what best practices and evidence indicate you should?
martire ralphMartire    This is no academic inquiry. That’s because the General Assembly is considering amending the Illinois Constitution to remove the requisite that income taxes be imposed at one, flat rate. If passed, it would allow income tax rates to track ability to pay, assessing lower rates on lower levels of income and higher rates on higher levels of income. This is known as a “graduated” rate income tax. To become law, this proposed amendment has to be ratified by you — the voters of Illinois. Now, if you’re still willing to take a rational, informed approach you’ll support the amendment because both best practice and the overwhelming body of evidence indicate it’s the right thing to do.
    From a best practices standpoint, a graduated income tax satisfies two of the four core principles of good tax policy — that it be fair to taxpayers and respond to the modern economy. Consider fairness first. It’s textbook tax policy that a fair income tax must vary based on ability to pay. This venerable principle goes back to 1776 and Adam Smith, the father of capitalism. In his seminal work, the “Wealth of Nations,” Smith posited that a fair tax in a capitalist economy should “remedy inequality of riches as much as possible, by relieving the poor and burdening the rich.”
    Smith contended that would be fair taxation in a capitalist economy, because affluent folks would receive a disproportionate share of income growth over time. A recent analysis of IRS data shows Smith was right. Over the 1979-2011 sequence, after adjusting for inflation, the wealthiest 10 percent in America realized 139.8 percent of national income growth — or more than all of it. That means fully 90 percent of all Americans on average earned 39.8 percent less in real terms in 2011 than in 1979.
    So, to treat taxpayers fairly, Illinois needs the flexibility to tax lower levels of income at lower rates than higher levels of income — something the state Constitution prohibits. This makes Illinois a tax outlier. Thirty-four of the 41 states in America with an income tax have a fair, graduated rate structure. Illinois doesn’t. According to a national study, that’s a primary reason Illinois ranks as one of the three most unfair taxing states in the country —imposing tax burdens (as a percentage of income) on low and middle income families that are more than double that of millionaires.
    Having one, flat income tax rate also makes no fiscal sense. Focusing taxes on low- and middle-income families, who are losing income in real terms over time, means tax revenue growth can’t keep pace with economic growth over time. To work, taxes have to respond to where the economy is expanding, not contracting. That’s why the lack of fairness in Illinois’ tax policy contributes to the state’s long-term structural deficit, which exists when, adjusting solely for inflation and population growth and assuming a normal economy, revenue won’t increase at a rate sufficient to maintain current service levels from year-to-year. Illinois’ structural deficit dates to at least the 1970s.
    As for deficit scolds who maintain Illinois has a spending not a revenue problem — there’s simply no data to support that claim. Since 2009, the state has cut General Fund spending on the core services of education, health care, social services and public safety by some $4.7 billion in nominal dollars, and will be spending almost 30 percent less in real terms on those services in FY2014 than it did in FY2000. The only budget increase has been to repay debt service — which past decision makers incurred to avoid fixing tax policy and artificially paper-over the structural deficit.
    Won’t taxing rich folks more scare millionaires out of Illinois and tank its economy? Well, no. No peer reviewed study has found that tax policy has a statistically significant correlation to domicile choices by people generally or millionaires specifically. Housing costs, location of family members, weather and job considerations are what matter.
    As for killing the economy, well, over the last decade, the nine states in America with the highest marginal income tax rates had better growth in state GDP per capita and better change in median wage than the nine states that have no state income taxes at all — including Texas and Florida.
    In fact, the evidence overwhelmingly indicates there’s no meaningful correlation between state tax policy and economic competitiveness. Other things matter far more, like public sector investment in education and infrastructure, or availability of natural resources and climate-based advantages (think palm trees and beaches). This conclusion has been reached by the vast majority of peer-reviewed research studies, conducted by both nonpartisan entities like the Congressional Budget Office, independent organizations like the Center on Budget and Policy Priorities, and even conservative, anti-tax groups like the CATO Institute.
    Sure, there are outliers — like the Tax Foundation — which insist that having a fair tax system can harm a state’s economy, but the Tax Foundation’s work has been largely discredited. One independent review found the Tax Foundation “mischaracterized or exaggerated the findings” of research it cited, and even relied on one study which was subsequently contradicted by its own author. Robert Tannenwald, a long-time economist for the Federal Reserve, concluded that the Tax Foundation’s bias against graduated rate structures has “no empirical foundation.”
    Moreover, given that nine out of 10 workers earn less after inflation today than 30 years ago, using a fair rate structure to cut their taxes means they’ll likely spend their tax relief buying stuff, since their purchasing power has declined. This should stimulate the economy, because around 68 percent of all economic activity is consumer spending. Meanwhile, an income tax increase on wealthier folks won’t diminish their spending, given the dramatic real income growth they’ve realized over time.
    The bottom line here is clear: Going to a fair, graduated rate income tax would be a positive step forward for Illinois that deserves your support.
    Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank. This email address is being protected from spambots. You need JavaScript enabled to view it.