Progressive or flat? Overview of coming income tax debate

EDITOR’s NOTE: Following is an Illinois Business Journal overview of two bills that propose to change Illinois’ income tax law from a flat tax to a graduated tax. On the following two pages are this month’s Point/Counterpoint, which give opposing views on the proposals.
    
    “Graduated” and “progressive” have positive-sounding connotations, but when they’re used to describe taxation the words become subject of hot debate.
    That’s the broad view regarding a pair of identical resolutions that have been introduced in both the Illinois Senate and House (SJRCA 40 and HJRCA 33) and which face tremendous hurdles, including a vote of the people of the state, if they are to become law.
    The measures would amend the Revenue Article of the Illinois Constitution, to allow for state income taxes to be measured on graduated rate basis, instead of the current flat tax under which everyone pays the same rates. Further, the law would be changed so that any income tax imposed on corporations would not exceed the maximum rate imposed on individuals.
    If passed by the Legislature, the measure would be submitted to voters at the next general election, at least six months after its adoption.
    The bills were introduced on May 30, 2013, in their respective chambers by state Sen. Don Harmon,  D-Oak Park, and state Rep. Naomi Jakobsson, D-Champaign.
    Each bill “provides that there may be one tax on the income of individuals and corporations, that this may be a fair tax where lower rates apply to lower income levels and higher rates apply to higher income levels, and that no government other than the state may impose a tax on or measured by income.”
    At press time, neither the House nor Senate resolutions had advanced beyond their assigned committees, as supporters gauge public opinion and line up co-sponsors, but already they are being openly debated outside the chambers. Last month, all 47 members of the Illinois House Republican Caucus derided the proposal.
    House Republican Leader Jim Durkin, R-Western Springs, said his caucus is unanimously against the graduated income tax proposal.
    “There is a movement in Springfield by the majority party to move Illinois from a flat income tax to a graduated tax,” said Durkin in a statement. “The same party responsible for years of overspending, over taxing and a mountain of debt wants to move to a graduated tax for one reason and one reason only – to raise taxes and spend more money.”
  Democrats argue that their “progressive” tax plan is similar to that used by the federal government and 34 of 41 states that charge an income tax.
    Jakobsson, last year, told Associated Press: “We hear it said Illinois is a wealthy state and it is, but there’s also this great disparity. … We should have done this a long time ago.”
    Illinois’ income tax has been levied at a non-graduated rate since its inception in 1969.
    Both chambers of the Legislature would have to pass a resolution by a three-fifths majority to put a measure on the ballot. The ballot question would then have to be approved by either three-fifths of those voting on the measure or by a majority of those voting in the election.
     Underlying the contentiousness is the fact that a temporary state income increase approved in 2011 is due to partially roll back in 2015. That represents the potential loss of a major revenue source while the state still has billions in unpaid bills.
    Adding to the overall debate is yet another proposal, this one presented by House Speaker Mike Madigan, which would reduce the state corporate income tax by 50 percent (HR4479), from 7 percent to 3.5 percent in an effort to make Illinois more friendly to business.
    The graduated tax plan being floated by House Democrats includes seven tax brackets and a top rate of 9 percent, raising taxes on all income over $18,000.
    In January 2011, Illinois lawmakers increased the flat rate income tax on individuals to 5 percent from 3 percent and on corporations to 7 percent from 4.8 percent. They argued that the additional revenue was needed to pay down the state’s $8.5 billion backlog of unpaid bills and stabilize its economy.
    The higher tax rates are slated to decrease in January 2015. The personal income tax is required to decrease to 3.75 percent from 5 percent and the corporate rate is required to decrease to 5.25 percent  from 7 percent.
    Recent revenue projections by the Commission on Government Forecasting and Accountability show that between fiscal year 2011 (the year the tax hike was implemented) and fiscal year 2015 (the year the tax hike is required to partially sunset), the tax hike will have generated a total of more than $31 billion in new revenue for the state. Yet the state still has a backlog of $7.6 billion and one of the nation’s highest unemployment rates, according to the Illinois Policy Institute, a nonpartisan research organization that is against a graduated tax. The institute favors fixing the state’s financial crisis without increasing taxes or borrowing and releases a plan each spring,  Director of Media Relations Diana Rickert said.
    The institute said that under current Illinois law, the individual income tax rate will be 3.75 percent in 2015. Under the progressive tax-hike plan from Jakobsson, a higher 4 percent rate kicks in on any income of more than $18,000.  
    Her 5 percent tax rate applies to income earned after $36,000. When an Illinoisan earns more than $58,000, the Jakobsson tax rates jump to 6 percent, and again to 7 percent on income earned after $95,000 – nearly double the rate Illinoisans will pay in 2015.
    Another progressive tax plan, developed by the union-funded Center for Tax and Budget Accountability, increases the tax rate for anyone who earns more than $5,000.
    The top progressive tax rates vary in the states that have such a tax.  In Georgia, the top tax rate of 6 percent is applied to all income earned above $7,000. In Idaho, the top rate of 7.4 percent kicks in at $10,350. And in Maine, the top rate of 6.84 percent starts at $20,900.