On November 3, Illinois residents have a Constitutional referendum to change their method of taxation from a flat tax to a “fair tax.” The current system treats all Illinois taxpayers the same by levying a modest 4.95% rate. Under the proposed change, taxpayers would be divided among multiple tiers with a progression of increased rates based on higher levels of income, and both individual and corporate rates would be affected. By removing the Constitutional provision against graduated-rate taxes, the power of taxation is given to the state lawmakers who can decide varying levels of rates for various groups of taxpayers with a simple majority vote. In contrast, the flat tax provides some protection against outrageously high rates because it is impractical and politically unpopular to do so among certain segments of the population.
In anticipation of the referendum passing, the Illinois legislature passed a tax plan that would be implemented on January 1, 2021. Although the Illinois governor — like most progressive morons — has assured taxpayers that the change won’t affect most residents, the impact of the new plan will indeed have dire consequences for many individuals. The new tax rates range from 4.75% to 7.99%. While the lowest 20% of earners will see a decrease in rates, that translates into a whopping $6.00 on the median average earnings of $12,400. On the other end of the spectrum, the new plan includes not only higher rates, but also a recapture provision for highest earners, so that not just their marginal income, but their entire income, is taxed at the 7.99% rate. What’s more, the new plan does not index for inflation on marginal income levels which will result in taxes consuming a greater percentage of taxpayer income if income levels do not increase.
Businesses will also be adversely impacted. The base corporate rate will increase to 7.99%.
However, Illinois also has an additional set of taxes (called the PPRT) levied on corporate and pass-through income of 2.5% and 1.5% respectively. Combined with the new business rate, corporate income tax would be 10.49% and pass-through income tax would be 9.49%. At a time when businesses are struggling due to the pandemic, increased taxes only worsen the situation. Additionally, the business rate will be one of the highest in the nation, making Illinois a less competitive state in which to do business.
The new tax plan is intended to be a revenue raiser, originally calculated to be $3.6 billion in the first year — but that was before COVID-19. Yet the fiscal woes facing Illinois are overwhelmingly derived from massive overspending and ballooning pension obligations, and no tax hike will begin to fix it. According to Illinois Policy, the upcoming budget includes nearly $6 billion in deficit spending, with pension costs consuming more than 27% of expected general revenues. Furthermore, Illinois faces a current $4.6 billion shortfall. Without a balanced budget to restrain spending — Illinois has not seen one in 20 years — tax hikes will be inevitable. And by enacting the “fair tax,” Illinois lawmakers have the power of the purse to raise taxes and levy surcharges at their discretion.
According to revised revenue forecasts from the governor’s office, if the fair tax is enacted, the budget gap is approximately $6.2 billion; if the fair tax is not enacted, the estimated budget gap is approximately $7.4 billion. The change from a flat tax to a graduated tax imposed on Illinoisians is simply not worth the $1.2 billion in possible additional revenue when the legislature can’t even be bothered to find a way to cut spending. Governor Pritzker’s attempt to introduce equity in the tax code by making higher earners pay their fair share will hurt all taxpayers and businesses, especially at a time when the effects of COVID-19 on the economy are devastating across the board. The proposed “fair tax” is anything but for the taxpayers of Illinois.