Front Page Article
Graduated Income Tax - Not Fair
by Joyce Geiler
Proposed Constitutional Amendment
In May 2019, the Illinois General Assembly approved allowing Illinois voters to decide in November 2020 if the state’s flat-tax structure should be removed from the Illinois constitution and be replaced with a progressive or graduated income tax. The amendment on the ballot is simply to replace Illinois tax structure from a flat rate where everyone pays the same percentage tax, to a graduated or progressive rate, where the rate is determined by income. The actual percentage that can be levied by the General Assembly as the result of this amendment, if passed, can vary from group to group as deemed appropriate by the General Assembly. Voters have no direct vote on the actual percentage implemented.
The current income tax levied on ALL taxpayers is 4.95%. The flat tax rate, which began at 2.5% and has fluctuated over the years, has been part of the Illinois constitution since 1970, a year after income tax was first enacted in Illinois. It remained at 2.5% until 1990, except for a 2-year rise to 3%. From 1990 to 2010 the individual tax rate was 3%. From 2011 to 2014 the rate increased to 5%, then reduced to 3.75% for 3 years and in 2018 increased to the current 4.95%.
Voting yes for the constitutional amendment would give the General Assembly the authority to implement the graduated tax structure of their choice. The specific tax rate will not be decided by the voters in November, but will be decided by the General Assembly and subject to change with approval by the Assembly. The constitutional amendment sets no limit on the number of tax brackets that can be created and no limit on how high tax rates can be increased on groups of individual taxpayers -- including middle-income families.
The new income tax rates, which the Governor calls a fair tax, would go into effect January 2021. With the proposed constitutional change, the Pritzker administration estimates that 97% of Illinois residents will see at least a modest decrease in their income taxes.
The specific progressive income tax, which Governor Pritzker is proposing would reduce the rate on incomes of $100,000 or less. The amount of reduction has not been stated but the relief for low-income Illinoisans is estimated to be only $6. The proposal maintains the current tax rate of 4.95% on incomes between $100,000 and $250,000. Incomes between $250,000 and $500,000 would be taxed at 7.75 percent. Income from $500,000 to $1 million would be taxed 7.85 percent and income over $1 million would be taxed 7.99 percent. The corporate tax rate within the package would also be raised to 7.99 percent. The state calculator can be used to determine the change in income tax using the Governor’s proposed rates.
Proponents of assessing taxes based on income feel it is “fair” for those with higher income to shoulder a greater percentage of responsibility. According to this line of thinking, those who have stewarded their finances and increased their income will be taxed at a higher percentage for their stewardship. The tithe instructed by God is a flat 10 percent for all. Apparently, God feels 10 percent of $100,000 is as fair as 10 percent of $1 million.
Effect on Small Business
According to the Illinois Policy Center, small businesses are responsible for 60% of the net job creation in Illinois and are the businesses most at risk from the economic fallout of COVID-19. Unfortunately, the progressive income tax hike would be the largest for these businesses. Small businesses could face an income tax hike nearly five times larger than that for large businesses.
Total corporate income tax rate – including the Personal Property Replacement Tax – will increase from 9.5% to 10.49% (when including the replacement tax.) Personal property replacement taxes (PPRT) are revenues collected by the state of Illinois and paid to local governments to replace money that was lost by local governments when their powers to impose personal property taxes on corporations, partnerships, and other business entities were taken away. These taxes resulted when the 1970 Illinois Constitution directed the legislature to abolish business personal property taxes and replace the revenue lost by local government units and school districts. In 1979, a law was enacted to provide for statewide taxes to replace the monies lost to local governments. Corporations, partnerships, trusts, S corporations and public utilities pay these taxes. Corporations pay a 2.5 percent replacement tax on their net Illinois income. Partnerships, trusts, and S corporations pay a 1.5 percent replacement tax on their net Illinois income. Public utilities pay a 0.8 percent tax on invested capital.
The tax hike for pass-through businesses could be increase from 6.45% to 9.49% when including the replacement tax. A pass-through business itself pays no taxes. Instead, some control person, often the owner, pays the business taxes through that person's own personal tax return. Pass-through taxation typically applies to sole proprietorships, partnerships, and S-corporations upon that entity's ability to prove that it deserves pass-through status. This is opposed to either traditional corporations or C-corporations, in which the company itself pays corporate taxes on income the corporation earns. https://www.law.cornell.edu/wex/pass-through_taxation. Non-business persons may be confused by these terms but the take-away is that businesses will likely experience higher taxes with graduated tax implementation.
Effort to Have Amendment Proposal Withdrawn
In May 2020, a broad coalition of organizations representing small businesses, employers, farmers and taxpayers across Illinois sent a letter calling on the legislature to repeal Senate Joint Resolution Constitutional Amendment 1, which would impose a graduated income tax on Illinois. Article XIV §2(a) of the Illinois constitution specifically allows for this action by allowing for a proposed amendment to be “withdrawn by a vote of a majority of the members elected to each house.”
The coalition agreed that Illinois faced considerable challenges before the COVID-19 that are now even more dire. More than one million Illinoisans have filed initial unemployment claims since March 1st and over 160,000 loans to employers have been granted through the CARES Act.
As discussed in the above section of this article, graduated income tax would give the legislature broad powers to raise taxes on small businesses – the economic driver of our economy. Illinois job creators cannot withstand another economic blow as they struggle to reopen their doors and provide a livelihood for their employees. The coalition letter stated that Illinois lawmakers must repeal this amendment. Governor Pritzker responded by saying Illinois needs the progressive tax now more than ever.
Conversely, more than 100 labor organizations in Illinois endorsed the proposed amendment on the November ballot to change the state's flat-rate income tax structure to a graduated income tax system. Representatives from the UAW, AFL-CIO, the Illinois Federation of Teachers and the Illinois Brotherhood of Electricians held a virtual news conference to call for the passage of the fair tax amendment in November. The UAW spokesman said the income tax amendment would create jobs in the state.
Business groups counter that proposed amendment would make it easier for lawmakers to change the tax rates and income levels in the future. The constitutional amendment sets no limit on the number of tax brackets that can be created and no limit on how high tax rates can be increased on groups of individual taxpayers. The amendment would raise costs for small businesses, which could result in job losses. For example, what started out in Connecticut as a millionaire tax turned out to be a tax increase on people making $50,000 a year. The revenue that the Pritzker administration has been touting won't come in if people leave the state to avoid higher taxes.
The budget Governor Pritzker enacted and the Democratic supermajority voted for in May relies on more than $1 billion from the proposed tax. However, consider that the 2011 tax increase was used to pay about $3.6 billion in state bills, pay down $8 billion in pension bonds and pay about $21 billion into the state's five pension systems. Would another tax increase be used any differently?
Overall Tax Status of Illinois
Currently 7 states have a flat income tax rate: Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania. and Utah. Seven states have no income tax. Two states limit income tax to dividends and interest income only.
Kiplinger finance rates Illinois as one of the least friendly tax states. The state's 4.95% flat income tax rate actually isn't that high when compared to other states, but other taxes contribute to the poor tax atmosphere. For example, property taxes in Illinois are the second-highest in the nation. Average property taxes are $2,408 in taxes per $100,000 of assessed home value.
Average state and local sales tax is 8.78% with groceries being taxed. In Illinois, gas taxes and fees are $0.5387 per gallon (varies by county). Sales taxes are high, too. In some municipalities, combined state and local sales taxes exceed 10%. Most states exempt food and drugs from their sales tax, but that's not the case in Illinois.
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