Whether Illinois should adopt a graduated rate income tax has emerged as a core issue in the current gubernatorial campaign. This is a legitimate policy question that merits serious consideration by our next chief executive. After all, Illinois decision makers have historically failed to get state tax policy right — and that’s had consequences, none of them good.
Bad tax policy is one of the main reasons Illinois is projected to end its current fiscal year with an accumulated General Fund deficit north of $10.4 billion — which makes almost 40 percent of all service spending this year deficit spending. That’s no bueno, because over $9 out of every $10 of those expenditures goes to education, health care, human services and public safety. As for deficit scolds who caterwaul the problem is profligate spending — not poor tax policy — well, no data supports them. In fact, spending on services this year will be less than it was a decade ago in nominal, non-inflation adjusted dollars. Conversely, state tax policy is so flawed annual revenue growth isn’t sufficient to cover the cost of maintaining the same level of services from year-to-year after inflation.
Unfortunately campaigns rarely provide a platform for thoughtful analysis of crucial but politically thorny issues like tax policy, preferring instead to spout generalities to appeal to the greatest number of voters possible. So, to fill in some of the campaign-related blanks on this issue, here are three reasons Illinois should adopt a graduated rate income tax.
First is tax fairness. The income tax is the only tax that can be designed to comport with ability to pay — by imposing higher marginal rates on higher levels of income. That’s crucial, given the growth in income inequality over time. Since 1979, the wealthiest 10 percent have realized 108 percent of all real, inflation-adjusted growth in income nationally, leaving 90 percent of workers earning less in real terms now than three decades ago. Wealth in America is even more skewed toward the top, as Census data show the richest 10 percent hold 77 percent of all national wealth. Imposing higher marginal rates on top rather than low- or middle-income earners is fair, because it allocates tax burden in proportion to ability to pay.
Second, because the wealthiest have realized all income growth in America for 30 years, Illinois’ flat rate tax doesn’t respond to how income growth gets distributed in the modern economy. It therefore fails to produce adequate revenue over time — making it a principal cause of long-term deficits.
Third, having a graduated rate income tax won’t harm the Illinois economy. The economy is primarily driven by consumer spending, which accounts for roughly 67 percent of all annual economic activity. The best consumers are low- and middle-income families, who spend the majority of their earnings buying stuff, because their declining incomes don’t allow them to save. Reducing their tax burden tends to stimulate the economy, because what they save in taxes they spend. On the flip side, increasing taxes on wealthy folks generally doesn’t hurt the economy, because their disposable incomes are increasing so significantly over time, they don’t tend to spend less despite paying more in taxes.
For proof this is how things work, consider the relative economic performance of the nine states that have the highest top income tax rates, when compared to the nine states in America with no income tax at all. The non-income tax states include those frequently lauded as “economic marvels,” like Texas, Florida and North Dakota. Over the last decade, the nine no-tax states lagged the nine highest tax states in every major economic indicator, including growth in state GDP; GDP per capita; and personal income.
Look, even if the gubernatorial campaigns aren’t likely to do justice to this issue, the facts are clear: a graduated rate income tax is in Illinois’ best interests.
Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, and Arthur Rubloff Professor of Public Policy at Roosevelt University. email@example.com.
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September 18, 2018 at 08:12PM