The Corner

Fiscal Policy

Ending the Illinois Flat Tax (Maybe)

Illinois State Capitol in Springfield (benkrut/Getty Images Plus)

Rather surprisingly, Illinois’s state income tax is a flat tax, charged at 4.95 percent. That may change if a ballot measure for November proposed by the state’s Democratic governor, J. B. Pritzker (a billionaire from the Hyatt hotel dynasty), and backed by the Democratic legislature, is approved. The measure would replace the flat rate with a “progressive” structure topping out at 7.99 percent, the so-called “Fair Tax.” There will be a new lower rate of 4.75 percent, but observed the Wall Street Journal, “taxpayers in that range can expect savings barely enough for an order of deep-dish pizza.”

Flat taxes are, in my view, a good thing. As I argued on the Capital Note the other day in the course of discussing this initiative:

One of most interesting aspects of these proposals is the suggested move away from a flat tax. Apart from a flat tax’s simplicity and (to me) the virtue that its progressivity operates at only one level (wealthier taxpayers will still pay more tax, just not at a higher rate), it also comes with the advantage of ensuring that all taxpayers have at least some skin in the game, something that is appropriate both on grounds of (to use a much-abused term) ‘fairness,’ and because it increases the political cost of increasing that tax. Put another way, it provides an incentive only to increase taxes when truly necessary.

If, on the other hand, the bulk of the tax increase falls on a relatively narrow sliver of taxpayers, then the political cost of increasing that tax will be low, even more so if those hardest hit by the increase are more likely to be political opponents of those proposing the tax hike.

As the Journal suggests, a move to a progressive income tax would be likely to lead Illinois into a growing reliance on affluent taxpayers. New York’s experience demonstrates that dependency on the wealthy can come to look distinctly lopsided. According to E. J. McMahon, senior fellow at the Empire Center for Public Policy, the top 1 percent of earners pay 40 percent of New York’s income taxes and 47 percent of New York City’s income taxes.

Such a degree of dependence leaves New York vulnerable, for obvious reasons. And for equally obvious reasons, it’s worth asking whether Illinois’s wealthier taxpayers will hang around to enjoy making their increased “contributions” to their state’s battered coffers. They, after all, often fall into a category of taxpayer able to move fairly easily elsewhere, something that was true even before the increased possibilities of working from home that may become a permanent feature of the employment landscape after COVID-19.

The Wall Street Journal:

Illinois led the nation in out-migration over the past decade, with its population declining in each of the past six years, according to the Census Bureau. A 2019 survey by NPR Illinois and the University of Illinois found that high taxes were the top reason respondents gave for leaving.

In a later article, the Journal added:

The Tax Foundation ranks states by tax competitiveness, and its latest analysis is bad news for Illinois Gov. J.B. Pritzker and other progressive-tax backers. The Prairie State currently ranks 36th worst in overall tax burden because its flat individual rate of 4.95% offsets very high property and other taxes.

But its proposed slate of new individual income tax rates, along with a corporate tax hike tied to the same ballot measure, would drop the state’s rank overall to 47th. That would move Illinois into Dante’s ninth ring of tax hell, ahead of only New Jersey, New York and California.

And here’s Illinois Policy on the exodus from the state:

Illinois lost more than 850,000 residents to other states during the past decade, causing the state’s population to shrink for six consecutive years and suffer the largest raw decline of any state in the 2010s . . .

Meanwhile, in an indication of the trouble in which Illinois finds itself, a Chicago Tribune report from last week noted:

Illinois is “almost guaranteed” a credit rating downgrade to junk if its voters next month reject a constitutional amendment allowing the state to tax high-income residents more, a Citi research report said on Monday. However, Citi argued against non-investment-grade ratings for any U.S. state given the greater flexibility of states to weather fiscal crises than most U.S. corporations.

Illinois is the lowest-rated state at a notch above junk, with negative outlooks from all three major credit rating agencies. Moody’s Investors Service and S&P Global Ratings recently issued warnings about Illinois’ struggle with a huge unfunded pension liability and structural budget deficit that has been exacerbated by the fallout from the coronavirus pandemic.

“If Moody’s downgrades Illinois (general obligation bonds) to speculative grade, we expect other rating agencies to follow suit,” the Citi report said.

Oh yes, (via Bloomberg):

Illinois, the only U.S. state to borrow from the Federal Reserve, will likely have to tap the central bank again to help close its $4.1 billion deficit if federal aid doesn’t come through and voters reject a ballot measure to raise taxes on the rich, according to Governor J.B. Pritzker.

The cash-strapped state sold $1.2 billion in short-term debt in June to the Fed to help close its fiscal 2020 budget gap. While Pritzker is optimistic that stimulus will arrive at some point and voters next month will approve his signature agenda item to end Illinois’s flat income tax, he’s prepared to use the Fed’s Municipal Liquidity Facility, a lifeline for state and local governments, for a second time….

This ballot measure has also triggered a battle of the billionaires.

Fox:

The Chicago Sun-Times reports that Pritzker has poured $56.5 million of his own money into the Vote Yes for Fairness Committee, which is trying to get the initiative passed. The state’s richest man, hedge fund manager Ken Griffin, put in $20 million to fight Pritzker.

And now (via NBC):

Billionaire Jennifer Pritzker contributed $500,000 to the effort to convince voters to vote against the constitutional amendment on the November ballot – putting her in direct contention with her cousin, the state’s Gov. J.B. Pritzker, who has championed the proposal and poured millions of his own money into pushing for its passage.

I have a feeling that 2021 will be a year of the states, and not in a good way, and that Illinois is going to be playing a lead role, and not as the hero. The Pritzker family Thanksgiving might be a little rough too.

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