In ‘Fair Tax’ Fight, Echoes From Failed Attempts At Tax Reform In Illinois

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In the dueling campaigns for and against Gov. JB Pritzker’s signature plan to implement a graduated income tax structure in Illinois are the echoes of past attempts at tax reform. 

 

The players have changed and the policy proposals are different, but what remains constant are both Illinois’ underlying structural revenue imbalance and the element of mistrust of Springfield politicians.

Hannah Meisel reports on lessons in attempts at income tax reform in the 1930s, 1970s and 1990s and the reflections on the current fight over a graduated income tax.

The Nov. 3 vote to amend Illinois’ constitution and allow for a graduated income tax — instead of the flat income tax structure the state has had since 1969 — is not just the culmination of Pritzker’s three-year-long campaign for the change he vowed as a gubernatorial candidate, but also the reverberation of decades of fiscal policy and messaging. 

Trips back to the 1990s, the 1970s and the 1930s may be instructive.

 

Schools And Property Taxes

 

Plenty of governors, lawmakers, candidates and policy wonks have come to the same conclusions when identifying issues with Illinois’ tax system over the years: Local schools’ reliance on property taxes both creates inequities in education across the state, and drives up property taxes for homeowners. School costs covered by property taxes include local districts’ contribution to teacher pensions. That cost is much higher in the city of Chicago, which has a separate teacher pension system than the rest of the state. 

 

As a result, Illinois voters identify high property taxes as a top concern time and time again. 

 

Illinois’ complex, largest-in-the-nation network of local government taxing bodies also contributes to the state consistently ranking at or near the top among states with high real estate tax burdens. However, some policy thinkers say that raising more money from income taxes and using that to fund schools could solve both inequity in school funding and stabilize rising property tax costs at the same time.

 

In 1994, Democrat Dawn Clark Netsch built her gubernatorial campaign around that idea. Netsch’s “Tax Swap” would have raised Illinois’ income tax — then at 3% for individuals — to 4.25% in exchange for property tax relief. At the time, Netsch was serving as state comptroller after spending 18 years in the Illinois Senate. 

 

Netsch’s tax swap idea was fueled by her belief in the portion of Illinois’ constitution that says the state should have the “primary responsibility” for funding public education. After all, she wrote it into the state constitution as a delegate to Illinois’ 1970 Constitutional Convention.

 

But Illinois courts have not interpreted the clause as ironclad, and state funding for schools has never reached more than half of the total education funding equation — or even close. According to the State Board of Education, state funding accounted for 26.6% of school funding in the 2019 fiscal year. 

 

So in an effort to increase funding for education, Netsch proposed the tax swap. 

 

“We needed to do it because we could pay for it out of a broader-based, fairer tax structure,” Netsch said in a 2011 interview, reflecting on her career. She died in 2013.

 

She was running against then-Gov. Jim Edgar, a Republican who’d been elected four years prior. 

 

Edgar characterized Netsch’s signature tax policy as a 42% tax increase and went on to beat Netsch in a landslide. But after his re-election, he put together a blue-ribbon commission to study the issue, and the panel ultimately proposed a tax reform similar to what Netsch had run on. 

 

What’s A ‘Fair’ Tax?

 

The graduated income tax rates that would go into effect if voters approve the amendment promise to increase taxes on just the wealthiest 3% of Illinoisans, while keeping everyone else’s taxes either functionally the same or giving them a modest break. Pritzker says it should be enough to raise an additional $3.4 billion annually. 

 

The choices that went into that calculation are a reflection of both Illinois’ financial need and a movement in the last decade to recognize a deepening income inequality. 

 

Netsch’s take on the state constitution she helped frame is echoed by those who are pushing Pritzker’s so-called Fair Tax today. In that 2011 interview, Netsch joked that the constitution should’ve said “the General Assembly can raise money any old way it chooses with as few restrictions as possible.”

 

“And it’s not just a liberal big spending person talking,” Netsch said. You’ve got to be able to raise it in ways that reflect the change in society, really.”

 

One of those societal changes since the state’s constitution was ratified five decades ago is the growth of income inequality in America. In fact, many economists point to the 1970s as the decade in which economic growth in the U.S. began to slow and the income gap widened. 

 

Netsch ran for governor during a relatively prosperous economic period, but her messaging may have been ahead of its time. David Merriman, a professor of political science at the University of Illinois Chicago, said both the tax swap and Pritzker’s “Fair Tax” have similar aims.

 

“Both of them are focused on what’s fair,” Merriman said. “And I think a lot of people feel that the school funding system is terribly, terribly unfair. And now I think a lot of people feel that the income distribution is terribly unfair.”

 

Illinois’ 1970 constitution enshrined a flat income tax into the state’s supreme law — just one year after then-Gov. Dick Ogilvie and Chicago Mayor Richard J. Daley struck a deal to implement any state income tax at all. Before 1969, the state primarily collected revenue through statewide taxes on property, including real estate, and a sales tax. The latter came into being after a failed attempt at a graduated income tax during the Great Depression.

 

In the fall of 1931, two years after the stock market crash that precipitated the Depression, conservative Republican Gov. Louis Emmerson proposed a graduated income tax — in part to “be used to reduce property taxes,” the governor said at the time.

 

“The fairest distribution of governmental burden yet devised has been accomplished by the federal income tax,” Emmerson noted of the modern federal income tax implemented in 1913 by the 16th Amendment. The governor pointed to similar graduated tax structures that had been adopted by 16 states with “satisfactory results and the production of revenues at the expense of those best able to bear the burden.”

 

Despite stiff opposition from Chicago Democrats in the legislature, the graduated income tax passed after several months of negotiation and Emmerson signed it into law in early 1932. But eight months later, the Illinois Supreme Court struck down the entire law, leaving Illinois’ finances in dire straits as the Great Depression wore on. Emmerson’s Democratic successor eventually passed a sales tax to raise state revenue.

 

Decades later, Ogilvie and Daley’s deal implementing a flat income tax in exchange for “home rule” powers for larger municipalities — a power grab for Daley — passed both the legislature and constitutional muster as the Illinois Supreme Court upheld the tax soon after passage. 

 

Longtime statehouse observer Charlie Wheeler, who reported on the 1970 Illinois Constitutional Convention for the Chicago Sun-Times, said that fatigue over the tax issue just a year before may be the reason the 1969 flat tax was written into the constitution without much deliberation. 

 

“The majority of the delegates, as I recall, decided, ‘Well, why don’t we just embody what’s already in law and not get into this whole income tax fight again?’” Wheeler said. 

 

And, he added, delegates weren’t able to see five decades into the future. 

 

“Back in 1970, the gap between the bottom 10% [of income earners] and the top 10% was a heck of a lot smaller than it is now,” Wheeler said. “So there wasn’t that same level of concern.”

 

Exploiting Springfield Skepticism

 

Attempts to fundamentally change Illinois’ tax system can be politically risky. Even taking a position or showing one’s cards too soon can poison an idea before it gets off the ground.

 

State Sen. Rob Martwick (D-Chicago) learned this lesson the hard way after a graduated income tax structure he proposed in 2018 was used early on by opponents to the graduated income tax. Groups like the Illinois Policy Institute, a libertarian-leaning think tank pushing against the tax change, began using Martwick’s tax rates to build opposition, including in highly produced digital ads shortly after Pritzker was inaugurated last year — a month before he released his own graduated income tax plan. 

 

After Pritzker released his proposed tax brackets that would go into effect should voters approve the constitutional change, a coalition of business groups and other GOP-aligned organizations got to work on a plan to sway public opinion against a graduated income tax.

 

Polls and surveys from the last several years show that Illinois voters are in favor of a graduated tax plan — at least in theory. A survey conducted last fall by NPR Illinois and the University of Illinois at Springfield found 67% support for the concept of a graduated income tax.

 

But translating that support at the ballot box isn’t a sure thing. In order to pass, the amendment will need either 60% of yes votes or a simple majority of yes votes among all ballots cast. Recent polling on the issue has reportedly revealed it’s a tight race.

Groups opposed to a graduated tax needed to leverage what’s never in short supply in Illinois: distrust of Springfield politicians. Chief among that group is longtime House Speaker Mike Madigan (D-Chicago), who holds a Democratic supermajority in the Illinois House. Democrats also control the Senate, the governor’s office, the other five constitutional offices — including comptroller and treasurer — and the Illinois Supreme Court. 

 

Graduated income tax opponents have used the spectre of one-party rule to their advantage, waging a multi-million dollar campaign to match Pritzker’s own millions he’s poured into messaging in favor of the graduated income tax amendment. Opponents point to decades of fiscal mismanagement, and a structural budget deficit in the billions, despite having raised income taxes twice in the last decade. 

 

In reality, a 2011 income tax hike — the first in 20 years — was allowed to partially sunset in 2015. However, the state kept spending money to keep government services like schools going for two years while Republican Gov. Bruce Rauner battled with Madigan. Illinois rang up more than $16 billion in its unpaid bill backlog during a two-year budget impasse. The impasse only ended in 2017, as lawmakers raised individual income taxes to slightly below the 2011 rates and adopted a spending plan once again. 

 

UIC’s Merriman said skepticism of state government’s ability to handle finances among the electorate was an issue in 1994, and has only grown since then. 

 

“I think now there is even less trust, which is kind of at war with the fairness idea,” Merriman said. “Those things are put against each other. I think many people would be willing to vote for constitutional amendment on graduated tax if they felt they could control what was done in the future.”

 

Questions about the future of a graduated income tax should voters approve the amendment this week is another point of uncertainty that opponents to the tax change have exploited.

 

TV ads running statewide in the closing weeks of election season feature small business owners and other Illinoisans sowing doubt over whether a “yes” vote on the graduated income tax would open the door to increased taxes on middle-income earners in the future, or even retirement income — despite Pritzker’s stated opposition. 

 

Opponents point to states like Connecticut, which implemented a graduated income tax in 1996, initially targeted at higher income earners. But eventually, tax rates were adjusted to tax more Connecticut residents; opponents to Pritzker’s Fair Tax warn of a similar “rate creep” scenario in Illinois. 

 

Though Edgar sowed doubt about Netsch’s tax swap plan during the 1994 campaign, he eventually came to push for a similar plan after the commission he called for during his second term in office proposed it as a means for better school funding and property tax relief. 

 

Despite passing in the Illinois House, it was killed by fellow Republican Pate Philip, who at the time controlled the Illinois Senate. 

 

In that 2011 interview, Netsch provided some analysis on what she said was a misstep in Edgar’s political calculation.

 

“Doesn’t he understand that when you just spent about $7 or $8 million in a campaign trashing a plan as a 42% tax increase…and some of your legislators got elected by going along with that, maybe it is a little difficult to turn around on a dime,” she said.

Region: Bloomington,Feeds,News,City: Bloomington,Region: Central

via wglt.org https://www.wglt.org

November 2, 2020 at 06:20AM

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