Wednesday, May 2, 2018

Center for Tax and Budget Accountability Releases Report on Moving to a Graduated Rate State Income Tax in Illinois






Today, the Center for Tax and Budget Accountability released a report, "Cutting Taxes for the Middle Class and Shrinking the Deficit: Moving to a Graduated State Income Tax in Illinois," making the case for a graduated rate state income tax in Illinois, and illustrating two possible rate structures that would accomplish each of three major objectives:
  • Cut taxes for the bottom 98 percent of Illinois taxpayers;
  • Limit the top marginal rate to levels that already exist in the Midwest; and
  • Reduce the structural deficit by $2 billion in the first year of implementation
There are many ways to reach these objectives; the illustrations in this report are meant to show the feasibility of doing so, rather than prescribe any particular path.

In addition, the report will lay out several arguments for the urgency of passing a Constitutional amendment to allow a graduated rate state income tax in Illinois:
  • It is textbook capitalist policy that to be fair, a tax system should impose tax burden according to ability to pay-that is, it should impose higher tax burdens on affluent households than it does on low- and middle-income households, when tax burden is measured as a percentage of income. Illinois fails this basic standard of fairness, in large part because of its flat rate state income tax.
  • Illinois' unfair, flat rate income tax contributes to structural deficits. This is because a flat rate income tax cannot-by design-respond to the significant growth in income inequality that has occurred over the last three decades. This in turn has forced decision makers to underfund or cut the core public services of education, healthcare, human services, and public safety, which collectively account for over 90 percent of all General Fund spending on current services.
  • Illinois' unfair, flat rate income tax harms the private economy. Overtaxing low- and middle-income families, who are both good spenders and have flat to declining real incomes over time, reduces their consumer spending. The research shows that for every dollar the state cuts in General Fund spending on current services, the private sector loses an average of $1.36 in economic activity. Since most General Fund spending on core services covers the wages of the teachers, social workers, health care professionals, correctional officers, and other workers who provide public services, when Illinois' structural deficit compels the state to reduce spending, it is for the most part cutting the earnings of these workers.
  • Illinois' flat income tax rate is out of the mainstream. Of the 41 US states that impose an individual income tax, Illinois is one of just eight that impose the same flat rate on the income of all earners, regardless of how much they make or their ability to pay.
The two illustrations of possible rate structures in the report both use a graduated rate structure to impose higher tax burdens on higher levels of income to raise much-needed revenue. They differ in the mechanism used to deliver tax relief to the bottom 98 percent of Illinois taxpayers.
  • One illustration creates a $300 tax credit that would be applied to the state income tax bill of all filers with $200,000 of taxable income if filing jointly and $100,000 of taxable income if filing singly. The credit would also give tax relief on a decreasing basis to tax filers making up to $300,000 if filing jointly and $200,000 if filing singly. Its rate structure is below:
Taxable Income Above
Taxable Income Below
Marginal Rate
$0
$300,000
4.95%
$300,000
$400,000
7.50%
$400,000
$500,000
8.00%
$500,000
$1,000,000
9.25%
$1,000,000
$-
9.85%
  • The other illustration simply cuts the marginal state income tax rate for the first $100,000 of taxable income for all filers from 4.95 percent to 4.50 percent. Between $100,000 and $300,000 of taxable income, the rate would remain the current 4.95 percent. This structure is below:
Taxable Income Above
Taxable Income Below
Marginal Rate
$0
$100,000
4.50%
$100,000
$300,000
4.95%
$300,000
$500,000
8.00%
$500,000
$1,000,000
9.25%
$1,000,000
$-
9.85%

Both scenarios give 98 percent of Illinois taxpayers-those making less than $300,000 in taxable income-a tax cut, or in the case of single filers making between $200,000 and $300,000 in the credit illustration, no tax increase.


For more information, contact CTBA's Executive Director, Ralph Martire, at (312) 332-1049 or by email at rmartire@ctbaonline.org, or Research Director Daniel Hertz, at (312) 332-1481, or dhertz@ctbaonline.org.


May 1, 2018

FROM: 
Bonnie Cox, LWVIL President
Hilary Denk and Heather Cunningham, LWVIL Issues Co-chairs
Kathy Nesburg and Andy Daglas, Issues Specialists

ACTION NEEDED:
Illinois has the opportunity to greatly improve our fiscal situation by adopting a graduated rate income tax (also known as the Fair Tax), like that used in thirty-three other states. This requires amending the Illinois Constitution, which can only happen through a ballot initiative. The next opportunity to vote on a ballot initiative in a General Election occurs in 2020. In the meantime, we need to encourage our legislators to move ahead and put the graduated rate income tax initiative on the ballot.

Ask your state legislators to support House Resolution 1025This resolution calls for an amendment to the Illinois Constitution to allow for a Fair Tax. It recognizes that Illinois needs more revenue to provide for education and other core services and that it must look to the wealthy to provide some of that revenue. Illinois is still in a fiscal crisis and we must take steps to remedy the problem by increasing revenues.

For more information on the Fair Tax, see the attached fact sheet.

The House Committee on Revenue and Finance will be holding a hearing at 2:30 PM tomorrowMay 2, 2018. You can file a witness slip as an individualLWVIL has already filed in favor of the resolution at: http://my.ilga.gov/WitnessSlip/Create/112507?committeeHearingId=15988&LegislationId=112507&LegislationDocumentId=143004

Filing witness slips is a good way to demonstrate your support.

Find your legislators' contact info at  https://openstates.org/find_your_legislator/

WHY IT MATTERS:
  • A Fair Tax, unlike our current flat tax, reduces the tax burden on low- and middle-income families. While requiring wealthier individuals and corporations to pay more on the top levels of their income, a Fair Tax could lower the effective tax rate for over 90% of Illinois taxpayers.
     
  • According to the Responsible Budget Coalition, a Fair Tax could raise an additional $2 billion to fund schools, health care, infrastructure, and other vital services that have suffered severe budget cuts in recent years.
     
  • Currently, the Illinois Constitution limits the ability of voters and lawmakers to choose an optimal state income tax structure. By amending the Constitution to allow for a Fair Tax, Illinois will gain greater control and flexibility in its fiscal policy.
     
  • States with a Fair Tax on average grow their economies as fast or faster than states that do not.
     
  • Our current State Fiscal Policy position states: "The League of Women Voters of Illinois supports a diversified revenue system that principally relies on a combination of broad-based taxes and user fees, and is equitable, progressive, stable, responsive, and simple." LWVIL has supported and advocated for progressive tax reform since the 1990s. As our state's fiscal situation has worsened, in large part due to an inequitable tax structure, the urgent need for this reform has increased.
League of Women Voters of Illinois
Phone: (312) 939-5935 | Email: issues@lwvil.org | website: www.lwvil.org

5 comments:

  1. From April 16, 2012 on this blog:

    According to the Institute on Taxation and Economic Policy (ITEP) and the Center for Tax and Budget Accountability (CTBA), pension reform should not be the focus or the conversation. The dialogue should be about tax reform, where fairness, long-term revenue stability and a graduated tax rate become the State of Illinois’ priorities and solutions for its budget problems.

    The State of Illinois is one of a few states that do not tax equitably. It is in the top 10 regressive state tax systems, where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners (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; thus, the highest taxes paid are by its poorest citizens at 13 percent (ITEP).

    Furthermore, according to the Institute on Taxation and Economic Policy, the top five 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 deduction for federal income taxes paid that are coupled with a flat-rate tax 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).

    “At the core of the budget crisis facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy).

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  2. Continued...

    The wealthiest people should pay tax rates commensurate with their incomes, but they do not in Illinois. Attempting to balance the state’s budget by scapegoating public employees and "impairing" their pension plans ignores the fact that Illinois has an inequitable tax structure. Close the corporate tax holes and direct that money to public school districts and their communities so our schools and our neighborhoods will not be deprived of the essential resources they need.

    As stated by the National Council of State Legislatures, “a high-quality revenue system relies on a diverse and balanced range of sources.” Furthermore, the Chicago Metropolitan Agency for Planning also asserts that the “Illinois tax system does not reflect today’s economic realities… Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures.”

    As said by the Center on Budget and Policy Priorities (CBPP), “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… States that do not tax services [Illinois] probably could increase their sales tax revenue by more than one-third if they tax services purchased by households comprehensively.” Increasing the individual’s state income tax was not the correct solution for increasing revenue in Illinois.

    There needs to be a modernization of state and local budgets and their revenue systems. “The structural problems that have built up over time in these systems need to be addressed” (CBPP). According to the Center for Tax and Budget Accountability, policymakers need to “consider implementing a new revenue source targeted to repaying pension liabilities that is independent of base revenue streams from income, sales, and excise and utility taxes.”

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  3. Continued...

    What also needs to be considered? “The State of Illinois does not raise enough General Funds revenue to fund critical public services. Its rate of growth is lower than what is needed to simply maintain existing levels of services after accounting for inflation and population growth” (CTBA).

    Because the State of Illinois cannot evade its unfunded debt, policymakers need to create a graduated tax rate that 43 other states in this country now utilize; they also need to design a broad-base tax base and a better timing of tax payments. The State of Illinois needs to increase taxation on the wealthy and put an end to their “corporate welfare,” in particular, their extortive tax breaks and loopholes. Moreover, the State of Illinois needs to recognize that “the pension ramp was designed in such a way that it’s unfeasible” (CTBA).

    Hence, there needs to be a required annual payment from the state to the pension systems; the debt needs to be amortized for a longer frame of time just like a home loan that is amortized (CTBA). According to the National Association of State Retirement Administrators, policymakers must also “keep in mind that state and local pensions accumulate and pay out assets over decades. They have an extended investment horizon.” Therefore, the focus should be on revenue and not pension reform!

    It is absurd and deleterious to eliminate a teacher's compounded Cost-of-Living Adjustment (COLA) “meant to reduce inflationary erosion of the purchasing power of retirement benefits” (National Council of State Legislatures), or to extend a teacher’s years of employment, or to cap salary on the amount of money earned for a teacher’s retirement, or to shift the state’s normal costs to school districts as an exchange for a “contractually-binding funding schedule.” It is preposterous and irresponsible that Illinois policymakers have not fully funded the pension systems for decades, and that they have continuously attempted to violate the constitutional guarantee of public employees and retirees as well.

    Maybe we should call our mortgage loan officers and ask them to help us pay down our mortgage “going forward” as a “shared sacrifice!” Maybe we should ask them to cap their salaries too, work longer hours and more years before they retire, and reduce their own cost-of-living adjustments! While we're at it, let's ask the General Assembly and members of the Civic Committee of the Commercial Club of Chicago and Civic Federation to eliminate their Social Security COLAs, extend their retirement ages, cap their exorbitant pensionable salaries, and pay the unfunded liability instead.

    -Glen Brown

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  4. As usual (except for SB 1 Evidence Based Model School Funding--coming from the seizure of special ed. & other essential educational programs' monies, as per no new revenue available to fund), kudos to the C.T.B.A. for their painstaking & accurate work.
    That having been said, thorough & painstaking work was also completed as per solving the "pension problem," but, although Ralph Martire appeared to present the doable plan repeatedly, nary a legislator paid serious attention nor cared a whit, as those who, like I, had attended numerous meetings, can attest to.
    So, the question is, will the ILL-Annoy General Assembly even acknowledge the facts & vote on them accordingly (majority in both houses passing a bill), for the good of ALL IL citizens?
    Or--do our elected officials only pass legislation
    for unfunded programs, then tack on a "tax scholarship" (er, school VOUCHER)program that will take even more money from the public schools, with the end game benefiting, yet again,wealthier ILL-Annoy residents?
    I, myself, find it interesting as to how the ILL-Annoy G.A. lauds the C.T.B.A. when something is cherry-picked (Advance ILL-Annoy--a blatantly pro-school privatization organization pushed SB 1 E.B.M. School Funding Bill for at least 3 years(& you'll have to Google Illinois Sunshine to see who much money was donated to legislators who pushed this bill by the ILL-Annoy Stand on Children PAC {hint: 1,000s of $$$$ over time to individual legislators}), but repeatedly has kiboshed the painstaking & accurate work they've done w/regard to pensions.
    Anybody out there care to bet that the progressive tax legislation isn't passed in at least one house?
    (We'll not bring the guv into this--instant veto if it were passed.)

    "Hope for the best, prepare for the worst."

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  5. "We live in a state which under taxes the wealthy and over taxes the working families through a flat tax that is too low and brings in too little revenue to support the functions of the state. If you are rich, you pay too little. If you are a working person on a fixed salary, you pay too much. So, I repeat. The state government taxes are among the lowest, even with the increase to 4.75%. The cost of services are then shifted to local governments who must rely on excessive property taxes to pay for schools and basic services. If you live in Barrington or the north shore, you can absorb the property tax as the cost of doing business. If you live in Harvey or Robbins, you end up paying twice the rate of property taxes then up north. So the moral of the story is whether you are rich or poor determines if taxes are too high. For the poor: Yes. For the rich: No."

    -Fred Klonsky

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