Graduated Income Tax

In the spring session of the Illinois General Assembly, the House and the Senate, on party line votes, passed a proposed constitutional amendment that would authorize the imposition of a graduated income tax.  The proposed constitutional amendment will be considered by the voters at the November 2020 general election. 

The Illinois Chamber of Commerce strongly opposes amending the Constitution to authorize a graduated income tax.  The case against the graduated income tax is clear.

This article is the first of what will be a series of articles as we approach the vote on the proposed constitutional amendment in which I will debunk the contentions of the proponents of the graduated income tax.

The Illinois Constitution provides that in order to become effective, a constitutional amendment must be approved by either three-fifths of those voting on the amendment, or a majority of those voting in the election. The debate over whether Illinois should maintain its flat rate tax is the most important current tax policy discussion in Illinois.

The drafters of the 1970 Illinois Constitution and the Illinois voters who ratified the constitution determined wisely that Illinois should impose a flat rate income tax. Article IX, Section 3 of the Constitution states:

A tax on or measured by income shall be at a non-graduated rate.  At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations.  In any such tax imposed upon corporations the rate shall not exceed the rate imposed on individuals by more than a ratio of 8 to 5.

The proposed constitutional amendment would change Article IX, Section 3 as follows:

The General Assembly shall provide by law for the rate or rates of any tax on or measured by income imposed by the State.  A tax on or measured by income shall be at a non-graduated rate.  At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations.  In any such tax imposed upon corporations the highest rate shall not exceed the highest rate imposed on individuals by more than a ratio of 8 to 5.

The amendment grants the Illinois General Assembly unlimited authority to craft a graduated income tax rate structure.  Graduated rates can be imposed on the income of individuals and corporations.

The amendment is not limited to authorizing a graduated rate structure.  The amendment eliminates the prohibition of imposing multiple income taxes on individuals and corporations.  The current prohibition prevents the General Assembly and the Governor from passing and approving legislation that adds an additional income tax burden to particular types of taxpayers.  The amendment would end this prohibition.

The elimination of the prohibition against multiple income taxes is important because it allows the General Assembly to target particular industries or categories of taxpayers for discriminatory treatment.  Certain industries or taxpayers are politically unpopular. 

If the amendment is adopted nothing would prevent the General Assembly from passing legislation imposing a second tax, or some type of income tax surcharge, on any industry.  For example, the General Assembly could conclude that nuclear power plants, tobacco companies, fast food companies or investment firms that take advantage of the lower federal tax rate afforded to “carried interest” should be subject to a second tax or surcharge because of some determination of that such taxpayers do not pay their “fair share” in light of the nature of their business activities.

The flat rate tax and the “one tax” requirement prevents Illinois lawmakers from singling out particular types of taxpayers or particular types of income for discriminatory treatment.  This protection is eliminated if the proposed constitutional amendment is adopted.

The flat rate tax ensures all citizens pay their fair share to fund state government. Contrary to the contentions of the opponents of the flat rate tax, the current structure is not regressive in the strict sense of the word. The current Illinois income tax structure has a progressive effect. The current Illinois income tax uses various exemptions and the earned income tax credit to lessen the burden on the poorest Illinois citizens.  In this regard, Illinois treats its poorest citizens better than in many of the surrounding states.

The flat rate income tax provides a necessary brake on tax rate increases on individuals – everyone at all income levels shares the pain of a tax rate increase.  Proponents of the graduated income tax cite the history of income tax increases under the current structure for the proposition that it is difficult for the General Assembly to raise tax rates and will remain difficult under a graduated rate structure.  Their assertion simply is not true.

It will be much easier to raise income taxes under the proposed amendment.  As discussed above, the proposed amendment allows the General Assembly to single out particular types of taxpayers and particular income levels for increased income taxes.  It defies credulity for the proponents of the amendment to assert that it will not be easier to enact higher tax rates on a minority of taxpayers, who may be a unpopular group of taxpayers, than it is to raise taxes on all taxpayers.

Proponents of the amendment assert that the Illinois flat tax is outside of the mainstream. This is simply incorrect. Here are the facts – 43 states impose income taxes on individuals and 41 tax wage and salary income.  7 states do not have an income tax on individuals.  9 states impose their income tax on individuals at a flat rate.  32 states have a supposed graduated rate structure.  But, 10 states with a graduated rate structure begin their top brackets at under $25,000 in taxable income and 2 states begin their top brackets at $30,000 in taxable income.  Therefore, only a minority of the states have a truly “graduated” rate structure.  The current Illinois flat tax is consistent with the majority of the states.

The constitutional amendment authorizes a graduated income tax on corporations.  Only 13 states impose a graduated income tax on corporations.  A graduated income tax on corporations is outside of the mainstream.  The Illinois flat rate tax on corporations is in the mainstream.

The Illinois flat rate tax is one of the best economic advantages Illinois possesses over neighboring states.  The adoption of the proposed constitutional amendment will eliminate that advantage.