Illinois Governor Wants a Graduated Income Tax. Can He Sell the Idea to Voters?
By Dan Petrella and Rick Pearson
Less than two months after taking office, Democratic Gov. J.B. Pritzker embarked on a new and potentially bruising political campaign Thursday by seeking to win public approval of a graduated-rate income tax that he contended would raise $3.4 billion by increasing taxes for the wealthy while lowering taxes for 97 percent of Illinois residents.
"Instituting a fair tax as I've proposed will improve the arc of our state's finances forever and will make our state more fair for everyone," Pritzker said in unveiling proposed tax rates and income brackets for his long-discussed plan to replace the state's constitutionally mandated flat-rate income tax.
Currently, all Illinois residents are taxed at 4.95 percent, regardless of income level. Pritzker's proposal is largely reliant on raising taxes significantly on residents making more than $250,000 a year, with those earning $1 million and up taxed at 7.95 percent of their total income.
"It's wrong that I would pay the same tax rate as someone earning $100,000 or, even worse, pay the same tax rate as someone earning $30,000, which is why 33 states and the federal government use lower rates for lower earnings and higher rates for higher earnings," said Pritzker, a billionaire heir of the Hyatt hotel fortune.
The governor, who pushed a graduated-rate income tax in his campaign for office but until now offered no details, acknowledged it was only the beginning of negotiations with lawmakers.
But the graduated tax concept has been widely rejected by the business community and Republican lawmakers, with both groups reiterating their opposition Thursday.
"Today's massive tax hike proposal will further harm the state's manufacturing sector, which has already lost more than 300,000 jobs since the turn of the century," Mark Denzler, president and CEO of the Illinois Manufacturers' Association, said in a statement. "Taxing and spending are not the answer to our daunting challenges."
Pritzker warned of opponents using "scare tactics," and said it's now up to those who are against his proposal to present an alternative plan for closing the state's $3.2 billion budget deficit, paying off a backlog of nearly $8.5 billion in unpaid bills and dealing with $134 billion in unfunded pension liabilities.
Without a graduated income tax, Pritzker said the only options would be a 15 percent across-the-board spending cut or an increase in the flat income tax rate to at least 5.95 percent. The governor has previously said he would earmark $200 million annually from the new tax revenue toward pension debt on top of the state's legally required payments.
"I respect the right of opponents to disagree with this proposal. But they should do so in good faith with a specific counterproposal, not pie in the sky," he said.
"Now, there are those who want to scare people by claiming that this proposal will cause residents and businesses to flee Illinois. They couldn't be more wrong," Pritzker said. "They ignore the fact that people and businesses are fleeing our state now under our current regressive tax system, yet states with fair tax systems on average grow faster and create more jobs than Illinois."
Pritzker proposes dropping the personal tax rate to 4.75 percent for the first $10,000 of income for single and joint filers. Income between $10,000 and $100,000 would be taxed at 4.9 percent, and the rate would remain 4.95 percent for income between $100,000 and $250,000.
From there, the top rates would be 7.75 percent for income up to $500,000, 7.85 percent for income between $500,000 and $1 million, and 7.95 percent for the entire income of someone earning more than $1 million in a year.
Under Pritzker's plan, a family of four with a household income of $61,000 would see $41 in income tax relief before any exemptions, deductions or credits, and a couple with an income of $250,000 would save $65, according to the governor's office. A family of four with an income of $5 million would pay an additional $150,000 in state income taxes.
The governor also proposes increasing the current property tax credit by 1 percentage point, from 5 percent to 6 percent. He would create a per-child tax credit of up to $100 for individuals earning less than $80,000 and joint filers earning less than $100,000.
The corporate tax rate would increase from the current 7 percent to 7.95 percent, matching the top personal rate.
The governor's proposal would give Illinois the second-highest top marginal tax rate among its neighboring states. In Iowa, rates top out at 8.53 percent for income above $73,710. Wisconsin's top rate -- 7.65 percent on income above $252,150 for individuals -- is slightly lower than what Pritzker proposes for Illinois. Indiana has a flat income tax rate of 3.23 percent.
Before Pritzker's plan can be implemented, three-fifths majorities in each chamber of the legislature must approve a constitutional amendment doing away with the flat tax requirement. The measure would then require voter approval, which couldn't happen until at least November 2020. The tax rates would be implemented through separate legislation.
While the next general election is nearly two years away, the issue already promises to be one of the biggest ballot measure fights in Illinois history, with "dark money" groups that aren't required to disclose their donors lining up on either side. One -- Think Big Illinois -- is tied to the governor, and the other -- Ideas Illinois -- is tied to business interests.
The pushback to Pritzker's plan from Republican lawmakers was immediate. "The House Republican caucus stands united in opposition to a $3.4 billion tax increase on Illinois families and businesses," House GOP leader Jim Durkin, of Western Springs, said in a statement. Before Pritzker released any details, House Republicans held a news conference at the Capitol last week to make their opposition known.
Senate Republicans on Thursday joined their House colleagues in unified opposition. "Without guaranteed protections for middle class families, we are opposed to the governor's $3.4 billion tax increase," the Senate GOP said in a statement.
But Democrats hold enough seats in both chambers of the legislature to approve the constitutional amendment without any GOP votes. Whether they'll be willing to do so remains in question.
Democratic leaders welcomed Pritzker's proposal but stopped short of endorsing the specifics.
A spokesman for Senate President John Cullerton said he "looks forward to a comprehensive, bipartisan discussion on this issue, one that is frankly long overdue."
"For years people have been saying Illinois should be more like our neighboring states with more modern and fairer tax systems," Cullerton spokesman John Patterson said in an emailed statement. "He eagerly awaits negotiations."
House Speaker Michael Madigan didn't comment on the specifics of Pritzker's proposal but wants to work with the governor and lawmakers on a graduated income tax, spokesman Steve Brown said.
"As he's said since November, he plans to be supportive of the governor's efforts," Brown said.
Madigan twice backed efforts to amend the state constitution to create a 3 percent tax surcharge on income above $1 million. He never got enough votes to put the question on the ballot, but voters in 2014 endorsed the idea by a wide margin in an advisory referendum. The 7.95 percent top rate in Pritzker's plan matches what Illinoisans would currently pay on income above $1 million if Madigan's idea had been adopted.
Laurence Msall, president of the nonpartisan budget watchdog Civic Federation, commended Pritzker for releasing the details of his plan. The Civic Federation does not have a position on graduated income taxes generally or Pritzker's plan specifically, Msall said.
"Coming forward with the specificity removes a lot of the uncertainty and speculation as to what the governor and his team intends to do," he said. "It provides a real opportunity for the state of Illinois' policymakers to engage in a meaningful debate on the future of tax policy in Illinois."
Msall said one of his organization's initial concerns is that charging the 7.95 percent rate on all income for people who earn more than $1 million could lead to "very significant tax avoidance."
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