Illinois Issues: Why Does The State Have A Flat Income Tax?
Illinois is one of only eight states with a flat income tax. The reasons can be traced to the state’s first-ever successful attempt at putting an income tax in place. An effort to change the current tax structure is underway, but supporters face a fast-approaching deadline.
When the framers of Illinois’ Constitution, which was adopted in 1970, were considering the revenue article, the state’s income tax was practically brand new.
Gov. Richard Ogilvie signed the tax into law in 1969. The fiscal situation at the time will sound familiar to those who follow Illinois politics today, although much less dire. The state was facing a deficit of more than $1 billion. The proposed income tax, which was flat and taxed individuals at a 2.5 percent rate and corporations at a rate of 4 percent, was supported by the Republican Ogilvie and Democratic Chicago Mayor Richard J. Daley, but its passage was still a hard-fought battle in the legislature. After that compromise was worked out, those working to draft the Constitution were in no rush to tinker with it. “To allow a graduated rate would have been a move away from the status quo — a move the delegates were not willing to make,” wrote Joyce Fishbane and Glenn Fisher in their book, Politics of the Purse: Revenue and Finance in the Sixth Illinois Constitutional Convention.
In the 1930s, an attempt at imposing a version of a graduated income tax had been struck down by the state’s Supreme Court as unconstitutional under the state’s 1870 Constitution. “There was great uncertainty in 1969, whether we could have any income tax at all and there was pretty much a conclusion if we did have one, it would have to be flat rate,” says Charlie Wheeler, former longtime Statehouse reporter for the Chicago Sun-Times and current director of the Public Affairs Reporting Program at the University of Illinois Springfield.
Wheeler, who reported on the Constitutional Convention, says that delegates were also “very aware of the fact” that voters would have to approve their end product. “They didn’t want to rock the boat, particularly in the revenue article by suggesting a gradated income tax.” Wheeler says they opted for “the safest thing to do,” which was to “codify in the new Constitution the status quo.”
But in the decades since a flat tax was enshrined into the state’s Constitution, progressive groups have called for a change to that piece of the compromise, which ushered in the state’s first income tax. They seek an amendment allowing for a gradated plan that would tax different levels of income at different rates. Supporters of an effort currently underway to make the change to a gradated tax have just a couple weeks to convince lawmakers of their case.
During the debate over the state’s Constitution there were those who backed versions of a revenue article that did not prohibit a graduated tax. However, the issue was not the subject of strong advocacy from the groups that would seem likely supporters. “Chicago Democrats could have provided for a graduated income tax by voting as a bloc,” wrote Fishbane and Fisher. But they did not. “Permitting graduated income tax was not, however, a matter vital to organizational maintenance or enhancement.” In other words, adamant support of a graduated income tax would not have helped the Democrats politically.
Some Democrats did not want to risk backing a different and potentially unpopular tax concept. * But they also wanted to make sure enough money would be available for education and social programs as the state moved away from taxing personal property other than real estate. “Democrats in the Constitutional Convention had a vital stake in the adequacy of state government revenue. They had to ensure a reasonably flexible income tax without appearing to stand strongly in favor of it,” Fishbane and Fisher wrote.
Meanwhile, Republicans argued that voters would not accept a Constitution with a graduated tax rate. David Davis, a downstate Republican delegate, said a graduated income tax would be “absolutely repugnant” to the people in his area.
While many education and labor groups supported a graduated tax, according to Fishbane and Fisher, they did little to lobby delegates for it. “Although major elements of organized labor were opposed to adoption of the new constitution, in part on the grounds that it prohibited a graduated income tax, labor made no significant effort to influence the convention’s decision on the matter.” The 40 delegates endorsed by the AFL-CIO “split almost evenly” on the issue.
That contrasts starkly with the present scenario, in which such groups, joined by organizations representing the state’s social safety net, are the backbone of a campaign to get a constitutional amendment for a graduated tax on the ballot.
To amend the Constitution to allow for a graduated income tax, three-fifths of the members in both chambers of the General Assembly must vote in favor of an amendment by May 6, 2016. There are currently two amendments up for consideration that would allow for a graduated income tax — one in the House and one in the Senate.
If one of the amendments clears both chambers, it would then appear on the 2016 general election ballot. To become a part of the state’s Constitution, it would have to receive the support of either three-fifths of those voting on the question or the majority of those voting in the election. The governor does not have the power to veto constitutional amendments approved by the General Assembly.
How do graduated income taxes work?
Recent proposals to amend the state’s Constitution to allow for a graduated tax, including those currently being considered by lawmakers, would only remove the requirement that the state have a flat tax. Just as the current tax rates aren’t enshrined in the Constitution, the proposed amendments would not set the rates for a graduated plan. This approach would give future lawmakers and the governors the ability to adjust tax rates with changes to the law instead of having the clear the much higher threshold of getting a constitutional amendment approved.
Rates have been proposed in separate bills. This year, that legislation is House Bill 689 and is sponsored by Skokie Democratic Rep. Lou Lang. Under that plan, tax rates would be reduced or remain the same for the vast majority of workers in the state, but they would spike sharply on income greater than $500,000 (for a single person with no children.) The bill would not affect corporate income tax rates. For more on how the rates would work under different scenarios, see this story.
A marginal graduated income tax does not apply a higher rate to all the income of higher earners. For example, under Lang’s bill, the tax rate for the income of a single person ranging from more than $500,000 to $1 million would be 8.75 percent. This rate would only apply to the income one earns above the $500,000 threshold. Any income the individual earns below that line would fall into the lower brackets and be taxed at rates equal to or less than the current rate of 3.75 percent.
Some critics of the plan have argued the rate schemes that have accompanied proposed amendments could be the lure for a bait and switch. The fear being that after voters approve a graduated tax, lawmakers would move to jack up the rates. “If you just give the power to the General Assembly by saying a tax can be gradated by law, then you have to trust the General Assembly not to go to hog wild,” Wheeler says. But he notes that the same political pressure currently making lawmakers reluctant to approve a tax increase now would not change. “If 99 percent of the people don’t have to pay any more (under the graduated plan), and you suddenly want to increase what they’re paying, their rate, there will be pushback. And it’s not going to be a politically easy thing to do.”
What are the arguments for and against a graduated tax?
Supporters of the change argue that it would help put state on a path out of fiscal crisis by providing about $1.9 billion in new revenue and putting most of the burden on wealthier residents — whom they argue can afford it.
“We support a fair tax where people who make a higher amount pay a higher rate and people who make a lower amount pay a lower rate because that’s the most fair way to make sure that children and families are not carrying a heavier tax load than they should be carrying,” says Emily Miller, Policy and Advocacy Director for Voices for Illinois Children. Supporters like Miller say that say that some of the revenue from a graduated income tax could be invested in things like education and infrastructure, which attract businesses and boost the state’s economy
They point to the fact that the majority of other states that have an income tax — and the federal government — all have graduated systems. “I firmly believe it is time for Illinois to join the modern era and implement a fair income tax that helps the hardworking people of this state hold on to more of their paychecks,” Sen. Don Harmon, a Democrat from Oak Park, said in a written statement.
House Speaker Michael Madigan, who was a delegate at the Constitutional Convention, says he supports removing the requirement that the state have a flat tax. “I believe that where there is taxation, the taxation should be based on ability to pay,” Madigan said on the House floor yesterday.
While some Democrats, particularly Harmon, have worked doggedly in failed attempts to get previous graduated-tax amendments to the ballot, the current political benefits for those supporting the plan are hard to ignore.
Democrats in the legislature are locked in an intense political battle with wealthy Republican Gov. Bruce Rauner — who when asked if he was part of the top 1 percent of income earners described himself as likely part of the top “.01 percent.” Needless to say, the governor is firmly a member of the wealthy group of residents the plan would target for more state revenues.
In a news release about the amendment, Harmon name-checked Rauner and alluded to his business-friendly Turnaround Agenda, which the governor frequently describes as a slate of structural reforms. “Illinois taxes all residents at a flat rate across the board, regardless of income. This archaic system of penalizing the poor and rewarding the rich is ripe for exactly the kind of meaningful structural reform Gov. Rauner has been demanding.”
If the amendment makes it to the ballot in the general election, the populist concept behind it could dovetail nicely with the populist narratives that have begun to dominate the conversation on both sides in the 2016 presidential race. If it comes up for a vote and does not pass, Democrats can still target Republicans who opposed it with ads claiming they voted against a tax cut on the middle class.
Opponents argue that the tax penalizes success and would have a negative effect on the state’s already struggling economy. “The majority party’s desire to skyrocket taxes is breathtaking. A progressive income tax would be the straw that breaks the Illinois economy’s back — sending our state even further into the economic doldrums,” Rauner spokeswoman Catherine Kelly said in a written statement. “It’s beyond time for Democrats to come to the table and work with the governor to find common ground on real structural reforms that will get our economy moving in the right direction.”
“Our argument is harder to make,” says Todd Maisch, president and CEO of the Illinois Chamber of Commerce. “It’s very easy to make the case: ‘don’t you want more stuff and have other people pay for it?’ That is a pretty easy argument to make.”
Maisch says that the current tax structure is fair because those who make more get a bigger tax bill. “We think that the flat tax is indeed a fair tax. The more you make, the more you pay. No one can dispute that.”
Even though increased rates in Lang’s plan kick in on income well into the six-figure range, Maisch says the sacrifices business owners made to get there should be considered. “Yes it sounds like a lot of money, but there are two or three things to consider. First and foremost is that those are businesses that are being successful in the state of Illinois, and we shouldn’t punish those entities,” he says. “Those first years you built your business, you may not take home any income. … People do that because they aspire to building something bigger and better, and they ought to be able to go ahead and enjoy the success of those businesses because they’ve created something that benefits the entire state.”
Proponents have less than a week’s worth of scheduled session days left to get an amendment through both chambers if it is going to make it to the November ballot. Miller is optimistic, but it will be an uphill climb. A push for an amendment in 2014 was unable to go the distance, and the political climate was less toxic at the time. Even if the effort to get the amendment on the ballot fails — if the past is any indication— it won’t be the last Illinois hears of the graduated income tax.
Editors Note: This story contains excerpts and information from a 2014 Illinois Issues story on graduated income tax proposals.
* A previous version of this story said that Democrats had made gains in the legislature, in part, because of backlash over Gov. Ogilvie's support of the income tax. That did not happen until the 1970 election.
Illinois Issues is in-depth reporting and analysis that takes you beyond the headlines to provide a deeper understanding of our state. Illinois Issues is produced by NPR Illinois in Springfield.