By ALAN J. ORTBALS
After four years of conflict and quagmire under Bruce Rauner, the arrival of Gov. J.B. Pritzker in Springfield is like a breath of fresh air as he quickly moved to push Illinois out of its rut and back on the road to prosperity.
“The budget I present to you today is an honest proposal,” Pritzker said in his budget address. “The costs are not hidden, the revenues I propose are not out of reach, the hole we need to fill is not ignored.” That stands in stark contrast to the games that Rauner persisted in playing rather than leading.
Yes, Illinois fiscal problems are, in part, the result of a pension system that let some retirees draw more than many CEOs. But the fundamental problem was Illinois’ 3 percent flat tax that was simply inadequate to provide the services and maintain the infrastructure of this state. This meager revenue stream grew more deficient over time. Rather than finding the courage to raise it, legislatures for decades shortchanged pensions and swept money out of highway funds to try to cover the hole.
You can’t cut your way to prosperity. I’m proud of the fact that the Illinois Business Journal survived the Great Recession when so many small businesses failed. Like many of you, we initially reduced spending. But, if that’s all we had done, we would have embarked on a downward spiral that would have ended in our demise. Instead, we thought creatively about new ways to increase sales and generate revenue. Because of that, we’re now approaching our 19th anniversary.
Similarly, Pritzker has proposed raising revenues in the short term through everything from legalizing marijuana to taxing plastic grocery bags. Long term, he has proposed shifting the state’s income tax from a flat tax to a graduated model like 33 other states already have. This is key to getting the state on a path back to prosperity.
A flat income tax rate is bad for individuals, bad for state government and bad for the state’s economy.
As an example, take two families. One has an income of $50,000; the other, $500,000. Under a flat rate of 5 percent, the first family would pay $2,500 in income tax. The second would pay $25,000. Which family will find it harder to part with that 5 percent? Obviously, the first as it makes their daily struggle to pay for the basic necessities of life — mortgage, utilities, groceries, etc. — even more difficult.
Meanwhile, government is hamstrung by the flat tax. The flat rate has to be kept low in deference to the people at the bottom and that makes it tough to do all the things that we expect the government to do. It also, makes its revenue stream too reliant on those people at the bottom who are the first to be laid off in tough times and the last to see wage growth in good ones. Wages have stagnated over the last 40 years while all of the income gains have gone to those at the top. No wonder Illinois’ flat tax hasn’t been able to maintain basic services.
And a flat tax is bad for the economy. Take that family with an income of $50,000 and a tax bill of $2,500. That $2,500 would otherwise be spent in the economy—maybe a TV or a washing machine or car repairs. Because it’s not, that means less revenue for the businesses that sell those items as well as less demand for the manufacture of them. Not so with the $500,000 family. All of their needs are met and excess funds are invested in things like stocks, bonds or real estate.
Pritzker has proposed a graduated income tax plan that will actually cut taxes for 97 percent of Illinois families while raising revenues by $3.4 billion and doing all of that while keeping the top tax rate well in line with other states. This is a no brainer.
It’s going to be tough to accomplish, however. The first step is the legislature which needs to pass it this session with a minimum of 60 percent approval in both houses. If that can be done, it will go to the voters in November 2020 when it will require another 60 percent approval margin.
This will be a tall mountain to climb but it’s one that needs to be scaled and I applaud Gov. Pritzker for having the courage to put it on the table. Now, the legislature needs to do its part — pass the legislation, put it on the ballot and let the voters decide.
Alan J. Ortbals is president and publisher of the Illinois Business Journal. He can be reached at [email protected] or (618) 659-1997.
By ALAN J. ORTBALS