The Illinois Chamber of Commerce is of the opinion that Illinois’ fiscal policy and tax laws should actively promote economic growth in Illinois by encouraging increased capital investment, productivity and the creation of new job opportunities for the citizens of Illinois. A graduated income tax would undercut these fundamental tax policy goals and further impede the economic growth and competitiveness of all Illinois businesses.
The delegates who authored the 1970 Illinois Constitution put forth a well-reasoned and responsible approach to income taxation that was founded on a solid philosophy of tax policy and administration. The framers of the constitution got it right in the first place.
Under current Illinois income tax laws, people who earn higher incomes pay higher tax bills and contribute a greater amount to support the cost of Illinois government.
The theory behind the constitution’s flat and low rate income tax structure is a desire to keep the largest possible number of citizens as taxpayers. Keeping almost every citizen responsible for paying for the cost of government is a means to keep citizens attentive to and personally invested in public finances. It is thought that such an approach provides a greater check upon the expectation that government is inherently motivated to grow and consequently always desirous of more tax revenue.
The concept of a low tax rate is generally intended to be a disincentive to the approval of exemptions, credits and other exceptions, as it is commonly understood that there is a greater incentive for taxpayers to pursue exceptions from the tax base when tax rates are higher or graduated.
The authors of the 1970 Illinois Constitution’s revenue article chose a broad-based, low, flat-rate tax, applied uniformly to all taxpayers. They understood it would become a major new revenue source for the state, but one that would, by design, be difficult to raise.
The delegates thought the power to tax is so fundamental that future legislatures should do so with great restraint. By designing an income tax structure that began with a philosophy of flat rates, low rates, broad based, highly inclusive and a built-in protection for non-voting corporations, the 1970 Constitution favors revenue growth through prosperity, population growth and economic expansion rather than raising tax rates.
Individual income tax rates are just as important to business activity as corporate rates. Proposals to raise income taxes on high-income earners, either by increasing top marginal tax rates, closing “loopholes” or limiting deductions will place a heavier burden on the individuals and families who own and operate small businesses. The majority of Illinois businesses are not corporations. Creative, dynamic and successful small businesses are the primary source of new job growth. The additional tax burden associated with a graduated income tax structure will hinder small business growth and impede employment opportunities.
Small businesses account for an ever-increasing percentage of business income and employment in Illinois. These businesses frequently operate as sole proprietorships or some form of tax pass-through entity (partnerships, Sub-S Corps or as an LLP/LLC). As such, small businesses pay individual income tax on their business income rather than a corporate tax. Increasing tax rates on the owners of small businesses leaves less available revenue for expansion of their small business. And that typically means less profit to raise wages, hire additional employees, buy equipment or make capital investments.
A graduated income tax is often criticized as a stealth tax. As taxpayer incomes rise over time with economic inflation, lower and middle income individuals are subjected to higher marginal rates, so-called “bracket creep.” Governments receiving the resulting increased revenues are less enthused about adjusting rate brackets to protect and remove taxpayers from their tax burdens as they are to spend the added revenue. A good example of bracket creep can be found in the federal alternative minimum tax, which was intended to tax only high-income earners but now snares middle-income taxpayers.
A graduated income tax is a less reliable source due to the volatility of the business cycle, creating sometimes wild fluctuations in tax revenues. While economic good times increase state revenues, economic downturns can result in increased deficits and put unnecessary stress on funding for critical social services. Illinois government should not ignore the lesson that was experienced during the recent recession.
Illinois’ current flat rate income tax is inherently fairer than a graduated income tax since everyone pays the same rate and tax increases uniformly impact everyone. A flat-rate tax does not promote divisive class warfare rhetoric or purposefully attempt to redistribute income according to a subjective fairness standard. A flat-rate tax requires all taxpayers to vigilantly stand guard against excessive government spending.
A graduated or “progressive” income tax is not tax reform - no matter how you look at it. The obvious objective of the campaign for higher income tax rates is to assure another major tax increase in Illinois.
Doug Whitley is president and chief executive officer of the Illinois Chamber of Commerce.