By Douglas L. Whitley
You’ll be hearing a lot more about this topic in the coming year – proponents will be doing everything they can to convince you, the citizens of Illinois – to vote “yes” for a Constitutional Amendment that would, for the first time in our state’s history, permit the Illinois General Assembly to impose a graduated income tax.
The November 2014 general election will be the last opportunity to pass a Constitutional Amendment authorizing a change in tax structure before the temporary income tax rate increases enacted in January 2011 begin to roll back.
The 1970 Illinois Constitution prohibits a graduated income tax. In order to amend the state constitution, both chambers of the General Assembly must pass a resolution by a three-fifths vote to authorize a voter referendum. The ballot question would then need to be approved by either three-fifths of those voting on the measure or the majority of those voting in the election.
The delegates to the 1970 Constitutional Convention wrote a revenue article that embraced a very fundamental philosophy of taxation by authorizing a broad-based, low, flat rate income tax. It was, and continues to be, an approach intended to keep taxpayers fully engaged in protecting their self-interest because it assures almost every citizen is contributing to the costs of government.
In 2011, the individual income tax rate was increased to 5 percent from 3 percent and to 9.5 percent from 7.3 percent for corporations. The corporate rate, when coupled with the federal tax rate, leaves Illinois with the fourth highest corporate income tax rate in the United States, as well as, in the whole industrialized world. On Jan. 1, 2015, the temporary tax rates for individuals and corporations are due to expire.
A graduated income tax is often criticized as a stealth tax. As taxpayer incomes rise over time with economic inflation, lower and middle-income individuals are subjected to higher marginal rates-so-called “bracket creep.” Governments receiving the resulting increased income tax revenues are less enthused about adjusting rate brackets to remove taxpayers from the tax rolls.
A good example of bracket creep can be found in the federal alternative minimum tax, which was intended to tax only high-income earners but is now impacting middle-income taxpayers.
A graduated income tax can create a disincentive to work as it punishes, through higher tax rates, those who choose to work more hours or longer days. An unintended consequence of progressive tax rates is to stifle the initiative and enthusiasm of the most entrepreneurial, industrious and productive elements of the population and of the economy. Some enterprising taxpayers will undoubtedly be encouraged to abandon Illinois, restructure their businesses or find alternative locations as a means to better maximize the fruits of their labors.
In addition to the increased cost of doing business on job creators in Illinois, a graduated income tax is a less reliable source due to the volatility of the business cycle-creating sometimes wild fluctuations in tax revenues. While economic good times increase state revenues, economic downturns can result in increased deficits and put unnecessary stress on funding for critical social services. Illinois government should not ignore the lesson that was experienced during the recent recession.
Illinois’ current flat rate income tax is inherently fairer than a graduated income tax since everyone pays the same rate and tax increases uniformly impact everyone. A flat rate tax does not promote divisive class warfare rhetoric or purposefully attempt to re-distribute income according to a subjective fairness standard. A flat rate tax requires all taxpayers to vigilantly stand guard against excessive government spending.
The Illinois Chamber of Commerce is of the opinion that Illinois’ fiscal policy and tax laws should actively promote economic growth in Illinois by encouraging increased capital investment, productivity, and the creation of new job opportunities for the citizens of Illinois. A graduated income tax would undercut these fundamental tax policy goals and further impede the economic growth and competitiveness of all Illinois businesses.
At its June 26th Board of Directors meeting, the Illinois Chamber Board voted unanimously to oppose a graduated income tax for Illinois. A graduated or “progressive” income tax is not tax reform-no matter how you look at it. The obvious objective is another major tax increase for the citizens of Illinois.
If you agree with this assessment, it is important that you let your legislators know that you do not support a constitutional amendment to authorize a graduated income tax in Illinois.
Douglas L. Whitley is president and CEO of the Illinois Chamber of Commerce.