Right now, the Illinois State Constitution forbids progressive taxation on income. In other words, it forbids doing what the IRS does on your federal income tax—taxing you at a rate that depends on your income.
On your federal income tax, of course, you are supposed to pay more if you earn more, but on top of that, if you earn more you pay at a higher rate. That is what “tax brackets” are about. The portion of reported income you pay in taxes goes up as you earn more. Illinois, however, is not allowed to do that. The Constitution now says there must be one and the same rate for all, regardless of income—in other words, the Constitution requires a “flat tax.” At the moment everyone in Illinois is supposed to pay 4.95 percent of their reported income, after a small deduction. Whether you report $5,000 in income after deductions, or $5,000,000, you pay 4.95 percent.
The proposed “fair tax” amendment would allow Illinois to tax different incomes at different rates, just like the IRS already does.
Why is this amendment proposed now? It is proposed because the state needs to collect more taxes than before. And why is that?
- Over the past forty years the federal government has reduced the share it pays for social programs. Some states have cut their programs to match the reduced funding. Illinois has cut its programs too, but not by enough to match the federal cuts. So the state has ended up having to pay more in the end.
- Unlike most states in the US, Illinois decided, way back in the 1930s when the Social Security system was created, not to let state, municipal, and university workers participate in the Social Security system. Instead, Illinois collected the same-sized contribution and put it into a variety of state-run pension funds. There are a lot of institutional employees in Illinois whose work doesn’t count for Social Security benefits, and who instead rely on their pension fund to supply, as a retirement benefit, whatever they might instead have received as a Social Security benefit, on top of any actual retirement pension. This was probably never a good idea, but for many years it worked all right. The problem arose when interest rates rose to high levels and stayed quite high for almost twenty years, through the 1980s and 1990s. Since the money collected from worker contributions was earning such good interest, there was a lot of pressure and opportunity for promises to be made offering correspondingly higher retirement benefits. When interest rates fell about twenty years ago, and stayed low to this very day, that meant the funds were no longer earning what they used to earn, and that those promises made to future retirees cannot be kept with pension funds alone.
- Another provision in the Illinois State Constitution states that pension promises once made can never be legally taken back—they have to be kept. That means that while pension funds all over the US declare bankruptcy and destroy the hopes and lives of retirees who expected to depend on them, that option is not open to State of Illinois-run pension funds. They have to stay in business and pay what they promised. All of it. Not a penny less. Therefore, there is no choice but to turn to the taxpayers to fund the difference between what the pension funds have and what they owe. Well, there is a choice—borrow—but as you may guess the state’s credit rating is not the greatest and may be cut further soon.
- In order to deal with some of Illinois’ financial problems, Governor Pritzker raised taxes on liquor, tobacco, and gasoline; and also raised annual car registration fees, some other fees, and a number of fines as well. These taxes, fees, and fines weigh most heavily on people with low and middling incomes. They are straight amounts, not even flat percentages. That means you pay the same no matter how little or much you earn. Frankly, and unsurprisingly, low earners are starting to hate Democrats more than the wealthy do!
- Because of its poor financial condition, the state does not fund schools and other government functions as much as is done in many other states. Communities in Illinois therefore have to rely on property taxes for funding that elsewhere would come from the state. There is little hope for property tax relief until state support increases, and the only real way for the state to raise more money is through raising taxes.
In short, the five reasons given above all add up to saying that the amendment is being now proposed because the state is “broke” and urgently needs to raise taxes on someone. The idea is to raise taxes on the rich this time, instead of on smokers, alcoholics, and drivers.
Of course, most rich people don’t like higher taxes. Nobody wants to pay money if they don’t have to. And the rich have seen how, once the idea of taxing unpopular things like smoking and drinking caught on, the tax keeps going up every time the state runs short. The rich insist that any little tax increase they may have to pay now is not the real issue. The real issue is how much they may have to pay ten or twenty years from now.
Michael Brün currently teaches economics online at Heartland Community College in Normal and at Illinois Wesleyan University in Bloomington.