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CTBA's report, "Cutting Taxes for the Middle Class and Shrinking the Deficit: Moving to a Graduated State Income Tax in Illinois," makes the case for a graduated rate state income tax in Illinois, and illustrates two possible rate structures that would accomplish each of three major objectives:
- Cut taxes for the bottom 98 percent of Illinois taxpayers;
- Limit the top marginal rate to levels that already exist in the Midwest; and
- Reduce the structural deficit by $2 billion in the first year of implementation
There are many ways to reach these objectives; the illustrations in the report are meant to show the feasibility of doing so, rather than prescribe any particular path.
In addition, the report will lay out several arguments for the urgency of passing a Constitutional amendment to allow a graduated rate state income tax in Illinois:
- It is textbook capitalist policy that to be fair, a tax system should impose tax burden according to ability to pay-that is, it should impose higher tax burdens on affluent households than it does on low- and middle-income households, when tax burden is measured as a percentage of income. Illinois fails this basic standard of fairness, in large part because of its flat rate state income tax.
- Illinois' unfair, flat rate income tax contributes to structural deficits. This is because a flat rate income tax cannot-by design-respond to the significant growth in income inequality that has occurred over the last three decades. This in turn has forced decision makers to underfund or cut the core public services of education, healthcare, human services, and public safety, which collectively account for over 90 percent of all General Fund spending on current services.
- Illinois' unfair, flat rate income tax harms the private economy. Overtaxing low- and middle-income families, who are both good spenders and have flat to declining real incomes over time, reduces their consumer spending. The research shows that for every dollar the state cuts in General Fund spending on current services, the private sector loses an average of $1.36 in economic activity. Since most General Fund spending on core services covers the wages of the teachers, social workers, health care professionals, correctional officers, and other workers who provide public services, when Illinois' structural deficit compels the state to reduce spending, it is for the most part cutting the earnings of these workers.
- Illinois' flat income tax rate is out of the mainstream. Of the 41 US states that impose an individual income tax, Illinois is one of just eight that impose the same flat rate on the income of all earners, regardless of how much they make or their ability to pay.