Illinois Considering Progressive Income Tax

Legislators in Illinois are considering a change to a progressive state income tax system, a move that has Democrats and Republican at odds with one another.

Of the 41 states that have a state income tax, 34 of those states use a progressive income tax system at present.  A progressive income tax system is one where the tax rate increases for taxpayers who earn a higher income.  Illinois and six other states currently use a flat tax system, where every taxpayer pays taxes at the same rate.

In 2011, to address budget shortfalls, legislators voted to increase the flat tax rate used by Illinois from 3 percent to 5 percent.  That tax increase was temporary, with it set to starting expiring January 1, 2014.  However, now that the time for the tax rate to return to the previous 3 percent rate is approaching, legislatures have a decision to make.

First, they can choose to let the tax rate return to the 2011 level of 3 percent.  This option would also mean that legislators would have to decrease spending by approximately 7 billion dollars.  Alternatively, legislators can seek to make the tax rate increase permanent.  While this move would address the budget shortfall, a permanent tax increase would not be popular with residents of the state.

Democrat legislatures have now proposed a third option, which is to change the Illinois state income tax to a progressive tax system.  Democrats are calling this option the fairest option, as it would mean that those taxpayers who have seen the largest increases in wealth would be responsible for more off the tax bill.

“We hear it said that Illinois is a wealthy state, and it is, but there’s also this great disparity,” noted Representative Naomi Jakobsson, D-Champaign, who is sponsoring the progressive tax change in the Illinois House.  “We should have done this a long time ago.”

House Republicans note that a move to a progressive tax system would be a permanent tax increase to many residents of Illinois, which would violate the promise Democrats made in 2011 about the tax increase being temporary.

Illinois taxpayers who earn more than $150,000 per year would be responsible for most of the tax increase, which is about 6 percent of Illinois taxpayers.  But Democrats supporting the measure believe such a change would increase annual tax revenue by almost $2.5 billion above the taxes collected with a flat tax of 5 percent.

In addition, Republicans note that many wealthy individuals who own businesses in the state would hardly call such a move fair since they would clearly pay more taxes than do others.  As these individuals are the same ones would own many of the businesses that provide a significant number of jobs in the state, they expect those individuals to move their businesses out of the state in order to avoid the tax increase.  The move of businesses would not only take jobs out of the state but also leave a smaller base from which the legislature could collect the taxes needed to fund the state.

“Taxpayers should be wary,” noted Senator Christine Radogno.  “This isn’t about fairness.  It’s about increasing revenue to fuel even more spending.”

If Democrats choose to move forward with the progressive tax plan, it will be a difficult measure to pass.  The Illinois constitution requires that the state use a flat tax system for state income tax.  A change to a progressive tax system would require that legislators amend the Illinois constitution.  Three-fifths of the state House and Senate would have to approve such an amendment to the constitution, and a majority of the population would have to vote in approval of the change as well.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.