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February 26, 2014

When the framers of Illinois’ Constitution, which was adopted in 1970, were considering the revenue article, the state’s income tax was practically brand new.

Gov. Richard Ogilvie had signed the tax into law in 1969. The fiscal situation at the time will sound familiar to those who follow Illinois politics today. The state was facing a deficit of more than $1 billion. The proposed income tax, which was flat and taxed individuals at a 2.5 percent rate and corporations at a rate of 4 percent, was supported by the Republican Ogilvie and Democratic Chicago Mayor Richard J. Daley, but its passage was still a hard-fought battle in the legislature. After that compromise was worked out, those working to draft the constitution were in no rush to tinker with it. “To allow a graduated rate would have been a move away from the status quo — a move the delegates were not willing to make,” wrote Joyce Fishbane and Glenn Fisher in their book, Politics of the Purse: Revenue and Finance in the Sixth Illinois Constitutional Convention.

Today, a coalition of unions, human service providers, education groups, community organizations and government reform advocates want to revisit that decision by presenting voters with a constitutional change that would allow lawmakers to approve a graduated tax instead of the state’s current flat tax.

During the debate over the state’s Constitution there were those who backed versions of a revenue article that did not prohibit a graduated tax. However, the issue was not the subject of strong advocacy from the groups that would seem likely supporters. “Chicago Democrats could have provided for a graduated income tax by voting as a bloc,” wrote Fishbane and Fisher. But they did not. “Permitting graduated income tax was not, however, a matter vital to organizational maintenance or enhancement.” In other words, adamant support of a graduated income tax would not have helped the Democrats politically. Recent Democratic gains in the legislature had been in part attributed to Ogilvie’s support of the income tax. The party had taken control of the Senate and reduced the Republican majority in the House. But Democrats also wanted to make sure enough money would be available for education and social programs as the state moved away from taxing personal property other than real estate. “Democrats in the Constitutional Convention had a vital stake in the adequacy of state government revenue. They had to ensure a reasonably flexible income tax without appearing to stand strongly in favor of it.”

Meanwhile, Republicans argued that voters would not accept a constitution with a graduated tax rate. David Davis, a downstate Republican delegate, said a graduated income tax would be “absolutely repugnant” to the people in his area.

While many education and labor groups supported a graduated tax, according to Fishbane and Fisher, they did little to lobby delegates for it. “Although major elements of organized labor were opposed to adoption of the new constitution, in part on the grounds that it prohibited a graduated income tax, labor made no significant effort to influence the convention’s decision on the matter.” The 40 delegates endorsed by the AFL-CIO “split almost evenly” on the issue.

That contrasts starkly with the present scenario, in which such groups are the backbone of a well-funded campaign to get a constitutional amendment for a graduated tax on the ballot. A Better Illinois counts the American Federation of State, County and Municipal Employees Council 31, Voices for Illinois Children, the Illinois Federation of Teachers, the Illinois Education Association, AIDS Foundation of Chicago and several small businesses and religious organizations among its coalition members. The group recently delivered petitions with 150,000 signatures from Illinoisans in favor of a graduated tax. To amend the Constitution to allow for a graduated income tax, three-fifths of the members in both chambers of the General Assembly must vote in favor of an amendment by May 4, 2014. It would then appear on the 2014 general election ballot. To become a part of the state’s Constitution, the proposal would then have to receive the support of either three-fifths of those voting on the question or the majority of those voting in the election.

While amendments allowing for a graduated income tax are filed practically every legislative session, groups on both sides of the issue are making a bit more noise about it than they have in the recent past. Proponents see cuts to education, health care and human services as an indication that the state’s revenue system is structurally flawed. Opponents argue that revamping tax policy at a time when Illinois is facing one of the highest unemployment rates in the nation and state government’s budget is still a mess is just a bad idea.

“If you give Springfield the money, they will spend it, and what they won’t do is they won’t reform. The whole problem that we have with the tax proposal is that Illinois needs massive reforms,” Ted Dabrowski, vice president of the Illinois Policy Institute, said during a recent debate in Springfield over the graduated income tax proposal. Dabrowksi says the 2011 temporary income tax increases gave lawmakers enough breathing room to avoid making substantial reforms to any of the state’s major spending areas, specifically education, Medicaid and employee retirement benefits. “The three drivers [of the state’s budget problems] there are education, health care and pensions. You can’t fix Illinois without fixing those three,” he says. The institute does not disclose its financial backers, but it reportedly receives funding from conservative groups. Campaign staff for Republican gubernatorial candidate Bruce Rauner told the Springfield State Journal-Register that he gave the institute more than $500,000.

Those in favor of the change say Illinois’ budget woes are actually caused by an antiquated revenue structure that is not taxing the parts of the economy that are growing. In recent decades, personal income growth has gone disproportionately to the wealthy. Supporters argue that taxation should follow that income growth. In the 1970s, the top 1 percent of earners held single digit percentages of all income. Their share has steadily grown since then. From 2002 to 2007, the top 1 percent saw an income growth of 61.8 percent, while the rest of the population saw a growth of only 6.8 percent. The wealthiest were harder hit by the recession, losing 36.3 percent of income between 2007 and 2009 while the rest of the country lost only 11.6 percent. However, the wealthy have done better in the recovery, making up almost all of that loss while 99 percent of earners have seen only a 0.4 percent growth in income. In 2012, the top 10 percent of earners took more than half of the total income, while the top 1 percent accounted for 20 percent of the total income.

Advocates for a graduated tax say taxing that growth will make for a system that asks those who make more — and are more able to pay taxes — to contribute a larger share in relation to their income, and a system that can sustain the services that citizens expect from state government. “One of the core principles of sound tax policy in a modern capitalist society is that your tax system be designed in a way that is fair for taxpayers,” says Ralph Martire, executive director of the Center for Tax and Budget Accountability. Martire says that even if state spending did not increase, stagnant revenues from a flat income tax could not keep pace with the inflationary costs of services. The center discloses its donors, which are mainly Illinois union groups and charitable foundations.

“There’s a remarkable consensus in Illinois about what the priorities are. Poll after poll shows that what people in Illinois want from state government is health care, human services, education and public safety. That consensus, however, has not been supported by an accountable revenue system that can support it — and that is a fair tax that asks people to support these priorities according to ability to pay,” says John Bouman, president of the Chicago-based Sargent Shriver National Center on Poverty Law.

But those who oppose the idea of a graduated tax see it as a money grab coming from interest groups that benefit from state spending. “It is a tax increase pure and simple,” says Arlington Heights Rep. David Harris, a budgetary point man for the Republican Party. “We just had a massive tax increase two and a half years ago, and we don’t need another one.’’ Dabrowski argues that the state, with billions in unpaid bills and an approximately $100 billion unfunded pension liability, is not better off than it was when the temporary income tax increase was passed in 2011. Under that increase, the rate is 5 percent for individuals and 7 percent for corporations, but the rates are scheduled to begin sloping down in Fiscal Year 2015.

Martire says because taxes hit middle-income residents harder, the inequity in the current tax system could actually make the change a difficult sell to the middle class. “We have a very unfair tax system. So low-and middle-income families rightly believe that they are overtaxed in Illinois.” And in exchange for that taxation, the services they receive are not necessarily as good as those in more affluent areas that have a wealthier property tax base. Martire says those middle-class taxpayers might say, “‘You’ve increased my taxes in the past, and I might even be willing to pay them, but look at our schools. You’ve closed our community mental health center.’”

A graduated income tax would actually cut rates on those residents, Martire says, while improving the services they receive. But he says that the realities of tax policy are complicated and can get lost when candidates are looking for a good sound bite or slogan that will get them elected. “‘I’ll never support a job-killing tax increase.’ Everybody likes jobs. Nobody likes taxes. It fits on a bumper. It fits on a mailer. It’s easy to repeat.” But he says the graduated tax would be neither job-killing nor an increase for most middle-class earners and even some higher-income earners in the state. “When you really drill down on this and you’re willing to take rhetoric and charged ideology out of it, the economic data and textbook fiscal policy are very, very clear.”

But Dabrowski points out that under one model from the Center on Budget and Tax Accountability, some of the income of middle-class taxpayers would continue to be taxed at the 5 percent rate, which is scheduled to sunset.

Martire’s response is that there are many ways to slice and dice the brackets, and his organization produced that model as just one example. “It’s not even a proposal. It’s just one little model to show you what you can do. We’re not married to anything other than making it a fair tax system,” he says. “We’re working on about seven or eight other different options for different legislators who are looking at this.”

The rates for a graduated income tax would not be included in a constitutional amendment; they would instead be set by law, as they are now. Dabrowski says it is a lot to ask of voters to trust lawmakers to resist the temptation of taxing the middle class at a higher rate as time goes on and the need for more revenue increases. “People are already a little bit tired of what’s happening in Illinois,” he says. “A lot of people in Illinois are frustrated, and they will vote with their feet.” He says the proposal is not happening in a vacuum and will not help the state’s reputation, which is already tarnished by corruption and perceived by many to be unfriendly to business. Dabrowski says the wealthy can afford to relocate, and middle-class taxpayers will then be stuck making up for the lost revenue.

Lawmakers in favor of the proposed amendment argue that it does not make sense to embed a rate structure into the Constitution because the threshold for changing it in the future, if needed, is too high.

“It’s a difficult thing to amend the Constitution under any circumstances, but I think our cause is just. We’re asking for a fair tax where people who earn lower income pay lower rates, and people with higher incomes pay higher rates,” says Oak Park Democratic Sen. Don Harmon, a sponsor of one of several proposed amendments that would allow a graduated income tax.

“I don’t argue with people who say we should be more clear as to what those rates will be, should this pass. I am certainly willing to do that, but I don’t think rates should be embedded in the Constitution.”

Harmon says tax increases are always politically unpopular, and allowing a graduated income tax structure would not make it any easier to pass a bill increasing rates.

Organized opposition to a graduated tax is already building in the House. All of the House Republicans and one Democrat have signed on to a resolution opposing any amendment. “The graduated income tax would be a disaster for the state,” says Barrington Hills Republican Rep. David McSweeney, the sponsor of the resolution. “They need 71 to pass it, and we have 48 opposing it.” McSweeney says that he believes supporters will try to pass an amendment after the spring primary election. With 118 members in the House, the math does not look good for supporters right now. But there are plenty of lame ducks heading into the spring session, and lawmakers on their way out of the job have been known to change their minds.

Both supporters and opponents agree that the issue of income taxes will likely become one of the hottest topics of the governor’s race. So far, Gov. Pat Quinn, who has supported a graduated tax in the past, refuses to talk tax policy.

“Our No. 1 focus has to be on pension reform,” Quinn told reporters in Springfield in November. “A budget is based on what your costs are. We don’t know what our pension costs are until we really address the pension reform issue. That is the No. 1 budget challenge that we have, and you don’t want to put the cart before the horse.”

Quinn has since signed legislation that, if upheld in court, is predicted to save $160 billion over the next 30 years.

Harmon and McSweeney both predict that the issue could be unavoidable for candidates. “I think this will be the campaign issue and overall issue of 2014,” McSweeney says.

Source: Illinois Issues