J.B. Pritzker (D) has been sworn in as the 43rd governor of Illinois, and with a Democratic supermajority in both chambers, theoretical discussions of a graduated income tax have moved into the realm of reality.
It’s no secret that Pritzker, a billionaire and one of the wealthiest U.S. politicians, campaigned on the promise of a graduated state income tax that would replace the state’s current 4.95 percent flat tax rate. Democrats have supermajorities in both the House (74 to 44) and the Senate (40 to 19), and House Speaker Michael Madigan (D) and Senate President John Cullerton (D) have both pushed for graduated progressive income rates in the past.
In his January 14 inaugural address, Pritzker stated plainly that “it’s time to start the earnest work of creating a fair tax system here in Illinois.” Beyond that, he has been notoriously reticent about going into any detail on what rates he supports, preferring to leave the details to be negotiated by lawmakers. And although there was a time he flirted with the idea of temporarily hiking the flat income tax rate while working on a graduated income tax package, he has since backed away from that position, according to an interview with NPR Illinois.
Chris Mooney, professor of state politics at the University of Illinois at Chicago, predicted that Madigan would want to get some Republicans on board to take some of the political pressure from such a big change to the tax code.
“The Republicans are very demoralized at this point. This last election, they lost a ton of seats and got slaughtered out there,” Mooney told Tax Notes January 16. “Minorities often respond with the [former U.S. Rep.] Bob Michel approach — going along and getting pieces of some crumbs, or the [former U.S. Speaker of the House] Newt Gingrich approach — come in and throw bombs everywhere. I would suspect they will be like the former.”
The road toward a graduated income tax may be a long one, however. Illinois’s flat income tax rate is mandated in the state's constitution, so an amendment would be required before graduated income tax rates could be imposed. A constitutional amendment needs to pass both the House and Senate with a three-fifths majority. The amendment would then go to the ballot, where it would need approval by three-fifths of those voting on the question or a majority of those voting in the election, according to the state constitution. The earliest an amendment could be put before voters would be the November 2020 election.
A 2018 survey by the University of Illinois Springfield Center for State Policy & Leadership's Survey Research Office and NPR Illinois found that 57 percent of respondents supported a graduated income tax.
“There have been major campaigns in 2013 and 2015 around passing legislation to allow voters to amend the constitution” to allow a graduated income tax rate, according to Lisa Christensen Gee, a senior state tax policy analyst with the Institute on Taxation and Economic Policy. “We had the votes, but it just didn’t get called to the floor. Polling and grass-roots work in the past have shown there absolutely is an appetite for this and there’s an inevitability, even if it takes a couple runs,” she told Tax Notes.
Gee also said that tax initiatives require a more informed grass-roots effort.
Regarding the question of how voters would be informed of the impact of the constitutional amendment, one hint may come from a bill Madigan prefiled in December. The bill, H.B. 141, would amend the Illinois Income Tax Act by making a technical change — removing the word “and” in the section naming the bill's short title and adding it back in in the same place. The bill is a “shell bill” or a “spot bill,” used to meet filing deadlines when the details of what will be changed still need to get hammered out.
The results of the General Assembly’s negotiations could potentially be introduced into this spot bill, which would specify the rates and brackets of a progressive income tax structure that would start in 2021. Voters would then be able to go to the polls in 2020 knowing what they would be voting on.
Tax Notes asked professor Daniel Hemel, who researches taxation, administrative law, and federal courts at the University of Chicago Law School, whether the change would survive a legal challenge. "I doubt that anyone could successfully challenge the progressive income tax structure in court. The state would say — and rightly so — that the dispute is not yet ripe. Illinois courts have several times addressed the question of when it becomes possible to challenge a tax," he said, citing Nat'l City Corp. v. Dep't of Revenue.
"I know of no case that suggests that you can challenge a tax that hasn't yet taken effect and that it is contingent upon the [future] passage of a constitutional amendment," Hemel continued, adding that he thinks that "the wise course for Governor Pritzker would be to set the rates and brackets before we vote in 2020."
"A progressive income tax can be structured such that most Illinoisans get a sizable cut and yet still the tax raises more revenue than the status quo. Having the rates and brackets in place would allow voters to see that's the case."
A Pyramidic Tax Structure
In his inaugural speech, Pritzker appealed to the liberal voter base, highlighting the regressive nature of Illinois’s tax system. “Our regressive tax system, including property taxes and sales taxes, currently has the middle class paying more than double the rate the wealthy pay,” he said.
Those numbers come directly from a 2018 ITEP report on tax fairness titled "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States." The report, which measures the effective state and local tax rates paid by all income groups, ranked Illinois — one of eight states in the nation that has a flat income tax rate — the eighth most unfair state and local tax system in the country.
Factoring in sales taxes, excise taxes, property taxes, and the flat income tax, the lowest quintile in Illinois — households making less than $21,800 — pay approximately 14.4 percent of their family income in taxes. The top 1 percent of earners — households making above $537,400 — pay about 7.4 percent of their family income in taxes.
The state has "a very upside-down system where the lower your income, the higher share of your income you pay in taxes,” Gee of ITEP told Tax Notes.
There have been several proposals for the structure of a graduated income tax in Illinois. In 2018 Democratic gubernatorial candidate Bob Daiber proposed a graduated income tax with five brackets and rates ranging from 1 percent to 6 percent, with only incomes over $1 million taxed above 4.95 percent. Another 2018 Democratic gubernatorial candidate, Sen. Daniel Biss (D), also supported a graduated income tax, pointing to Wisconsin and Iowa as nearby states with such taxes.
In his inaugural address, Pritzker took up this line, saying “the future of Illinois depends on the passage of a fair income tax, which will bring us into the 21st century like most of our Midwestern neighbors, and like the vast majority of the United States.”
A March 2018 analysis by the Institute for Illinois’ Fiscal Sustainability at the Civic Federation measured the impact of a graduated income tax in Illinois. Using 2015 adjusted gross income data from the state Department of Revenue, the analysis applied the brackets and rates used by Iowa and Wisconsin, as well as sample brackets and rates ranging from 3.25 percent to 6.25 percent.
The analysis found that applying Iowa’s brackets in Illinois would raise $7.3 billion in revenue and increase taxes on individuals earning over $33,000, and that applying Wisconsin’s brackets would raise $3.7 billion in revenue and raise rates on individuals earning over $31,000. According to the analysis, the sample brackets would raise $1 billion in revenue and raise taxes on individuals earning over $75,000.
The Center for Tax and Budget Accountability (CTBA) also proposed two plans for a graduated rate structure in the state that would cut taxes for the bottom 98 percent of taxpayers, limit top marginal rates to levels that already exist in the Midwest, and reduce the state’s structural deficit by $2 billion in the first year. The first plan would implement five brackets, climbing from 4.95 percent on income under $300,000 up to 9.25 percent on income over $1 million. The second plan is similarly structured and would place a 9.85 percent tax on income over $1 million.
CTBA Executive Director Ralph Martire, tapped by Pritzker for his transition team's Budget and Innovation Committee, spoke with Tax Notes on the structural problems facing the state. However, he made clear that he had signed a confidentiality agreement and could not speak on his discussions with the transition team.
According to Martire, Illinois’s structural deficit problems are partly due to a regressive tax structure that hasn't taken into account significant changes in wealth over the past four decades.
“Since 1980, after you adjust for inflation, 90 percent of Americans have lost income and are making less today than they were before, according to IRS data,” Martire said. “All the growth in income has gone to the wealthiest 10 percent. The only way to respond to that economic reality is to design an income tax structure where you have different rates that apply to different levels of incomes.”
A November 15 economic and fiscal policy report by then-Gov. Bruce Rauner's Office of Management and Budget projected a budgetary deficit of $546 million for fiscal 2019, with a potential increase of $170 million to $500 million due to stalled negotiations over a collective labor agreement that took a backseat during the state's two-year budget impasse. The state also has $8.15 billion in unpaid bills as of press time, according to the state comptroller's office, and $133.7 billion in unfunded public pension liabilities.
Pritzker mentioned these payments during his inaugural speech, saying “our government wastes tens of millions of dollars paying higher interest rates than almost any other state.”
Martire said pension debt is one of the primary fiscal challenges facing the state. “There doesn’t appear there is any real way to solve the problem other than [to reamortize] the debt and refinance a portion at a lower interest rate and put the proceeds in there faster.”
In a May 2018 report titled "Addressing Illinois’ Pension Debt Crisis With Reamortization," the CTBA proposed reamortizing the state's payment schedule to "create a sustainable, level-dollar plan" that would save the state $67 billion and fund the pension systems up to 70 percent by 2045.
According to the report, the state's current “backloaded repayment plan” requires annual payments topping $19 billion in the future. Reamortizing would allow for annual payments that never increase above $12 billion and would avoid cuts to current services by issuing $11.2 billion in bonds, the report said.