If Illinois legislators possess fortitude and selflessness, they can establish a revenue system with a balanced but low and broad tax base to spread the burden of taxes to multiple citizen payers and restructure the state’s antiquated single-rate income-tax method. They can also tax services to reflect today’s economy. This will increase the State’s cash flow.
Furthermore, they can change the timing of tax payments; raise taxes on the wealthy (their tax rates are the lowest it has ever been in 80 years) and eliminate “corporate welfare” (deductions and loopholes), while cutting taxes for the middle class and expanding the Earned Income Tax Credit for the poor. In addition, they can pass a jobs’ reform bill and award employers with tax credits for creating jobs in Illinois. These reforms can be accomplished if legislators demonstrate the courage to forego their allegiance to a two-party political system that is compelled by the Civic Committee of the Commercial Club of Chicago and Civic Federation.
A Broader Tax Base Is Needed in Illinois
According to the National Conference of State Legislatures (June 2007), “A high-quality revenue system relies on a diverse and balanced range of sources… If reliance is divided among numerous sources and their tax bases are broad, rates can be made low in order to minimize the impact on behavior. A broad base itself helps meet the goal of diversification since it spreads the burden of the tax among more payers than a narrow basis does. And the low rates that broad bases make possible can improve a state’s competitive position relative to other states.”
Tax Services to Increase Revenue
Consistent with creating a broader tax base, the Chicago Metropolitan Agency for Planning (CMAP July 2011) argues that the tax system in Illinois and most other states do not reflect today’s economic realities. In the last several decades, the U.S. economy has slowly shifted from manufacturing industries to a “services and information-based economy... Since the early 1970s, spending on services has exceeded spending on goods. In 2010, consumers spent twice as much on services (66.9 percent of total personal consumption expenditures) as on goods (33.1 percent of total personal consumption expenditures). This shift in the fundamentals of the economy has changed the relationship between consumption and tax revenue… Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures.”
Furthermore, in accordance with these statistics, the Center on Budget and Policy Priorities (July 2009) proclaims that “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services. Five of the 45 states with sales taxes impose them on fewer than 20 services… Research finds that purchases of some services do not fall as precipitously as durable goods purchases do when the economy slows nor rise as rapidly when the economy is booming” (Federation of Tax Administrators). States that do not tax services, such as Illinois, “probably could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively."
The tax system in Illinois is inefficient. “The tax system itself is influencing economic activity” (CMAP) by taxing goods that are consumed rather than the consumption of resources.
A Better Timing of Tax Payments Is Essential
Though cash flow continues to be an issue, as Illinois has had a running General Revenue Fund deficit… since November 2000…, cash management practices are greatly affected by budgetary practices in relation to deferred liabilities which place additional pressures particularly in the first and second quarters of the year to pay those expenses. Timing of tax payments also affects the State’s cash flow and should be adjusted accordingly.
Tax Equitably: Besides Ending “Corporate Welfare,” Tax the Wealthy
Illinois income tax uses a single rate structure that results in low-income wage earners paying more taxes than the wealthy. As stated by the Institute of Taxation and Economic Policy (ITEP November 2009), Illinois is among ten states in the nation with the highest taxes paid by its poorest citizens at 13 percent. The tax system is inequitable because lower-income taxpayers typically spend a higher percentage of their income on tangible goods than higher-income people.
In 2007, the top one percent of wage earners in the U.S. (with an average income of just under $2 million a year) paid 6.4 percent in total taxes while the bottom 20 percent of wage earners (with an average income of just under $11 thousand a year) paid 10.9 percent in taxes (ITEP).
Furthermore, consider that “sales and excise taxes are the most regressive element in most state and local tax systems. Because sales taxes are levied at a flat-rate, and because spending as a share of income falls as income rises, sales taxes inevitably take a larger share of income from low-and middle-income families than they take from the rich” (ITEP). The State of Illinois is one of seven states that use a “flat-rate tax.” In other words, the income of the wealthiest people is taxed at the same marginal rate as the poorest wage earners.
The Institute on Taxation and Economic Policy maintains that the top 5 percent of income earners in Illinois pay the least amount of sales, excise, property, and income taxes because of federal deduction offsets or substantial tax savings (regressive tax loopholes) from itemized deductions, such as capital gains tax breaks and deductions for federal income taxes paid that are coupled with a flat-rate structure. “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor rarely save at all – the taxes are inherently regressive” (ITEP).
The wealthiest people should pay tax rates commensurate with their incomes, but they do not in Illinois. There are no equal rights when there is inequity of wealth and when promises are made to support and to preserve the fortunes of a few at the expense and victimization of others. The continued attempt to balance the State’s budget by scapegoating public employees’ and their pension plans ignores the fact that Illinois has an inequitable tax structure. A progressive tax reform, or a more effective means of income redistribution where individuals who earn more would pay higher taxes, in addition to a low-income tax credit for low-wage earners, would make the State and local taxes fairer and address the budget issues in Illinois.
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