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Increasing the Income Tax Rate

Increasing the Income Tax Rate: One Method for Addressing Illinois’ Long-term Fiscal Problems

RELEASED: 

February 16, 2021

This past November, voters failed to ratify an amendment to the Illinois Constitution that would have permitted replacing the state’s flat rate income tax with a graduated structure. That in turn killed the “Fair Tax” legislation, which was designed to raise around $3.6 billion in new, annual revenue (during a normal economy), by imposing higher income tax rates on the wealthiest three percent in Illinois, while reducing the income taxes paid by the bottom 97 percent of the state’s earners. This failure was unfortunate because the Fair Tax would have helped address key structural flaws in the state’s tax policy that both drive its long-term General Fund deficits, and make Illinois one of the most regressive, and hence unfair, taxing states in the nation.

As things stand today, the state’s General Fund deficit is large and growing. Illinois is suffering from a long-term structural deficit in its General Fund that cannot be eliminated without re-amortizing the Pension Ramp as detailed previously, and either raising taxes, or significantly reducing spending on core services like education, public safety, and human services. The better public policy solution is to raise taxes, given that: (i) Illinois is already low spending on services when compared to the rest of the nation; (ii) Illinois has been cutting its real investment in core services for decades; (iii) underfunding core services is harming communities across the state; and (iv) flawed tax policy which resulted in poor revenue generation is the primary driver of the structural deficit in the General Fund to begin with.

There are two primary revenue sources that most states rely on to fund current services, the income tax and the sales tax. Illinois is no exception, with roughly 54 percent of its General Fund revenue in FY 2020—the last complete fiscal year before COVID-19—coming from state level income taxes (individual and corporate, collectively) and another 22 percent coming from sales taxes.

If the goal is to raise revenue to help address the structural deficit, while also making tax burden incidence fairer, the amount of any such income tax increase that low- and moderate-income families would have to pay should be offset with targeted tax relief. Please read more about CTBA’s solution to increasing the income tax in Illinois in tandem with the utilization of refundable income tax credits in the short report “Increasing the Income Tax Rate: One Method for Addressing Illinois’ Long-term Fiscal Problems”.

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Topics:Tax and Budget, Illinois Budget, Income Tax

Tags:Graduated Income Tax, Income Tax, Fair Tax, Inequality

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Related Reports

Illinois FY 2021 Enacted General Fund Budget Analysis

Released: Wednesday, August 19, 2020

If the Illinois FY 2021 Enacted General Fund Budget proves anything, it is that no matter how much things change in the world at large, the structural revenue problems in the state’s budget remain the same. Consider that, not even accounting for the impact of COVID-19, Illinois would nonetheless still have a General Fund deficit—meaning the state would not have had enough current revenue to cover some spending on public services this year—even if the pandemic never happened.

Despite the poor performance of the state’s revenue system over time, many commentators and editorial boards still try to blame the state’s historic, recurring deficit problems on overspending for services. The data, however, have simply never supported that canard, which is explained at length in this Report. The long-term structural deficit in Illinois’ General Fund—which will certainly become worse over the next few years as the impact of the COVID-19 pandemic on the economy is projected to drive revenue down significantly in all 50 states—is a real cause for concern.

A structural deficit like the one in Illinois’ General Fund, which is demonstrably driven by an underperforming revenue system, cannot be eliminated without raising taxes. In fact, Governor Pritzker has worked with the General Assembly to pass a tax reform package—known as the “Fair Tax”—predicated on replacing the flat rate individual income tax Illinois currently imposes with a graduated rate income tax. Recognizing the difficult political battle that will be waged over the Fair Tax, Governor Pritzker introduced two different General Fund budget proposals for FY 2021. But all of that happened before COVID-19 devasted the economy and drove down tax revenue in all 50 states, including Illinois. 

So, as expected, the economic downturn created by the COVID-19 pandemic has significantly worsened the state’s fiscal condition. That said, the analysis in this Report makes it clear that, even if the coronavirus had never happened, the fiscal shortcomings that plague Illinois’ General Fund are long-term, material, and structural, and cannot be resolved without comprehensively reforming the state’s tax policy. 

FY 2020, FY 2021, Governor Pritzker, Illinois General Fund, State Budget, State Revenue, Pensions, Fair Tax, COVID-19, CARES Act

Implementing the “Fair Tax” Will Help the Illinois Fiscal System

Released: Thursday, October 1, 2020

On November 3rd, 2020, Illinois voters will have the opportunity to ratify the proposed amendment to the Illinois Constitution that would eliminate the mandate that state income taxes be assessed using only one flat rate.

This is a crucial moment for Illinois since it has historically been, and currently remains, one of the most unfair taxing states in the nation. From a textbook standpoint, an “unfair” tax system is a regressive tax system—that is, one that imposes a greater tax burden on low- and middle-income families than on affluent families, when tax burden is measured as a percentage of income.  It is unfair because such a system fails to allocate tax burden in a manner that correlates with ability to pay, thereby worsening the substantial growth in income inequality that has occurred in the private sector over the last four decades. But building fairness into a state tax system is difficult, given that every tax—or fee for that matter—which is available to fund public services provided at the state or local level is regressive except for one: the income tax.  The income tax is the only tax that can actually be designed to comport with ability to pay and hence create some tax fairness, because it is the only tax that can be designed to assess higher tax rates on higher levels of income, and lower rates on lower levels of income.

Unfortunately, Article IX, Section 3 of the Illinois Constitution mandates that the state income tax be imposed at one flat rate across all levels of income. Hence, Illinois is constitutionally prohibited from utilizing the income tax to play the essential tax policy role of offsetting the natural regressivity of every other tax and fee imposed at either the state or local level. In fact, Illinois’ inability to build some fairness into its tax system through implementation of a graduated rate income tax has played a major role in driving the ongoing deficits in the state’s General Fund, while also hampering private sector economic growth.  The good news is a genuine opportunity for meaningful reform of the Illinois income tax now exists. That is because on June 5, 2019, Governor Pritzker signed Public Act 101-0008 (“P.A. 101-0008”) into law. If implemented, this legislation will create a new, graduated rate income tax structure, frequently referred to as the “Fair Tax” by proponents, to replace the state’s current flat rate income tax.

To learn more about how the Fair Tax not only ties income tax burden to ability to pay, but also raises new revenue in a manner that will effectively help eliminate some of the long-term structural flaws that have consistently made Illinois’ overall tax system one of the most unfair and poorly performing in the nation, please read the new CTBA Report, “Implementing the “Fair Tax” Will Help the Illinois Fiscal System Respond Better to the Modern Economy While Promoting Tax Fairness.”

Graduated Income Tax, Income Tax, Fair Tax, Inequality
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