A movement is afoot to amend the Illinois state constitution and move from a flat income tax to a progressive system.
Expect it to have some legs.
We’re just opening the door on the 2014 legislative session and there are already constitutional amendment bills in both the House and Senate with powerful sponsors and lots of cosponsors. These bills have plenty of steam behind them as they wouldn’t have gotten there without the support of the leadership. It’s also an easy vote for a legislator to cast as a yea, doesn’t raise constituents’ taxes or even amend the constitution to make it possible. It simply lets the voters decide and who can argue with that?
On the other side are two unpalatable political alternatives. The legislature could take no action regarding taxes and the temporary income tax increase would evaporate at the end of the year, leaving a great, big, gaping hole in the budget. Or, it could vote to extend the elevated tax rate just a few months before running for re-election in the fall. Neither one appears likely.
So, I expect the legislature to vote to put the constitutional question on the ballot, which I think is good. I believe that voters should set fundamental tax policy and this gives them the opportunity to do it. I also think a graduated income tax structure is good for the state and good for the economy.
You hear plenty of rhetoric about how Illinois is a spendthrift state; how we need to live within our means; and how we need to cut all the wasteful spending. That, however, is just what it is—rhetoric. If you examine the facts, you find that Illinois ranks 45th in taxes, 42nd in per capita spending and 50th in the number of state workers per capita.
You’ll also find that a lot of the state budget is out of the legislature’s control — transfers of funds to local governments and service on debt, for example. That part of the budget that it does control — “discretionary spending” — which covers everything from education to public safety, has been cut drastically over the last 12 years. Higher education has taken a 40 percent haircut over that time period; public safety, more than 20 percent; and there’s no end in sight. We simply can’t cut our way to prosperity.
Clearly, we don’t have a spending problem. We have a revenue problem and our regressive, flat income tax is the Achilles’ heel that hamstrings our state — both our government and our economy.
A flat income tax is overly dependent on the bottom of the income pyramid. As we have seen nationally, growth in income has become increasingly more lopsided over the last 30 years. People at the bottom of the income pyramid experience the least growth in income and are the most likely to be laid off or see their wages and/or hours cut. They provide a faulty, unreliable tax base for the state. In good times, their income lags behind the rest of the economy and hobbles tax revenues. In bad times, their income takes a nose dive and takes the state budget with it.
A flat tax also hurts the state’s economy. Because people at the bottom of the income pyramid spend everything they make, when you take a dollar out of their paycheck for taxes, you take away a dollar that they would have spent on food, clothes, gas, etc. And, in turn, you take a dollar away from those companies that would have sold them those items. Less spending means less demand for labor at every step that supplies those goods and services, further reducing employment. And all of this reduces sales tax revenues for the state.
Conversely, people on top of the pyramid have excess income that they don’t need to pay bills. A modest increase in tax rate doesn’t impact their spending habits at all and it puts the state’s revenues on a much firmer base. As we have seen in recent years, when times are good, the people at the top of the pyramid derive most of the benefit. When times are bad, they are far less impacted than the people at the bottom.
This is not class warfare; it’s pragmatic tax policy. There’s an old saying, a rising tide raises all boats. Well, that rising tide is consumer demand and a progressive income tax structure drives it.
If you’re worried about being the odd man out, don’t be. Some 35 other states have graduated income tax structures including our neighbors: Wisconsin, Iowa, Missouri and Kentucky. It’s about time we joined them, established a sensible income tax structure, and put our fiscal house in order.