Loyola University of Chicago School of Law, JD 2022
If you live in Illinois, you have likely seen in the past couple of days this vibrant blue commercial at least once or twice. The commercial encourages Illinois voters to “Vote Yes for Fairness” at the polls this November by voting their approval of an amendment to the 1970 Illinois Constitution. The proposed amendment would change the state’s current state income system from a flat tax to a graduated income tax. Illinois Governor J.B. Pritzker made the adoption of a progressive income tax a centerpiece of his policy agenda in a budget address back in February 2019, and it was geared up to be a focus of election-season debates before the COVID-19 pandemic took precedence. With the Illinois general election less than fifty days away, however, the ‘Vote Yes for Fairness’ campaign has bolstered its attempts at garnering voters’ approval of the proposed amendment.
Illinois’ income tax system history
Currently, the Illinois state constitution mandates that income tax be collected at one, flat rate across all income brackets for both individuals and corporations, trusts, and estates. The current income tax rate for individuals in Illinois is 4.95 percent, while the rate for corporations is seven percent. Under the present system of flat rate taxation, people with incomes of forty-thousand dollars per year and those with incomes of two-hundred-fifty-thousand dollars per year both pay 4.95 percent of those amounts as their state income tax.
While the actual rate has fluctuated over the years, the flat tax system has been part of the Illinois constitution almost since an income tax was officially enacted in the state. The Illinois government first approved a progressive income tax in 1932 as a way to generate revenue and finance public relief during the Great Depression. This first attempt at a state income tax was struck down by the Illinois State Supreme Court as unconstitutional, and the state political leadership’s efforts to pass an income tax did not surge again until the 1960s. In 1969, then-Governor Richard Ogilvie got a flat tax rate plan signed into law, which applied a 2.5 percent rate to individuals and a four percent rate to corporations. The Illinois Constitution in 1970 included Article IX, Section 3, which allowed the state to levy a flat-rate tax on income, and explicitly prohibited a graduated income tax.
Nonetheless, after becoming Governor in 2018, J.B. Pritzker proposed the constitutional amendment to repeal Illinois’ flat tax, which both chambers passed in the final month of the 2019 legislative session. Article XIV prescribes how an amendment introduced in the Legislature, also known as a “legislatively referred constitutional amendment,” can be adopted into the Illinois Constitution. To become part of the constitution, the proposed amendment must be approved by either sixty percent of those voting on the question or a majority of those voting in the election. This likely explains the increase in ads promoting the amendment so close to election day.
It is important to note, however, that the constitutional amendment alone would not actually change the tax rates. A separate bill, namely Senate Bill 687, sets the proposed new rates and could take effect beginning January 2021 if voters ratify the amendment. The bill sets forth rates generally, as follows: those earning over $1 million would be taxed 7.99 percent; income between $500,000 and $1 million would be taxed 7.85 percent; incomes between $250,000 and $500,000 would be taxed at 7.75 percent; those who earn incomes between $100,000 and $250,000 would be taxed at 4.95 percent (maintaining the current rate); those who earn incomes of $100,000 or less would experience a reduced rate; and the corporate income tax rate would be 7.99 percent.
Pros and Cons of the Fair Tax Amendment
Illinois is only one of the approximately eight states that has not adopted graduated income tax rate structures. The Pritzker administration posits that a constitutional change could result in an estimated ninety-seven percent of Illinois residents seeing at least a modest decrease in their income taxes. Governor Pritzker also says that the new rates would generate billions of dollars in revenue for the state, which could help pay off the state’s large and backlogged budget deficit. Advocates of the amendment argue that the current structure is unfair because of the way it disproportionately burdens middle and lower-income families. Further, supporters of the graduated income tax add that it makes more sense fiscally because it allows states to focus taxes on the wealthiest and enables the income tax rates to respond to changes in the economy, which means that tax revenue can expand with economic growth.
On the other hand, opponents of the Fair Tax emphasize that an increase to Illinois’ already-exceptionally high taxes could be detrimental to its chances to compete with neighboring states to attract economic growth and will drive more people and businesses to leave the state. Additionally, the amendment’s challengers warn that such a significant tax will burden employers, particularly small businesses which employ 46.6 percent of employed Illinoisans, thus contributing to the current outmigration of business and higher earners. Lastly, adversaries point out that middle income tax earners (one of the populations this amendment is meant to help) in other progressive income tax states have experienced higher tax rates than expected under the system, possibly because that demographic homes the bulk of taxable income.
With fervent support for both sides of the argument, it will be interesting to see how the vote plays out in November.