Martire: Millions of reasons the Fair Tax failed

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This November, voters failed to ratify an amendment to the Illinois constitution that would have permitted replacing the state’s existing flat rate income tax with a graduated structure.

That in turn killed the "Fair Tax" legislation, which was designed to raise around $3.6 billion in new, annual revenue (during a normal economy), by imposing higher income tax rates on the wealthiest three percent in Illinois, while reducing the income taxes paid by the bottom 97 percent of the state’s earners.

At first blush, it seems somewhat surprising voters rejected the Fair Tax. After all, it would have increased taxes on only a select few of the wealthiest people in Illinois. How few? Well, of the over 6.2 million individual income tax returns filed in the state, only 189,000 would have seen a tax increase. How wealthy? According to the most recent data available from the IRS, the net, after-tax income of the wealthiest 3% in Illinois increased by $16 billion between calendar years 2016 and 2017.

Moreover, all the evidence indicates that implementing a graduated rate income tax is one of the key fiscal reforms needed to help counter the long-term structural deficit that has plagued Illinois’ General Fund for decades. A "structural deficit" occurs whenever revenue growth is inadequate to cover the growth in the cost of providing the same level of public services from one year to the next, adjusting solely for changes in inflation and assuming a normal economy.

Illinois’ flat tax helps drive its structural deficit, because the state cannot impose higher rates on higher levels of income to generate adequate revenue over time by responding to worsening of income inequality over time. Consider that, after adjusting for inflation, the incomes of Illinois’ wealthiest 1% have ballooned from an average of $411,177 in 1979 to over $1.45 million by 2017. During the same time the average income for everyone else in Illinois rose from just over $51,000 to just over $61,000.

A structural deficit forces the public sector to underfund the services it provides, which explains why total General Fund expenditures on current services in FY 2021 will be at least 20 percent less in real terms than they were in FISCAL 2000. Continually underfunding public services harms almost every community, given that over 96 percent of all General Fund spending on services goes to the core areas of education, health care, human services and public safety.

So why did so many vote against their own self-interest — not to mention the interests of the communities in which they live? They were deceived into doing so by a bunch of mega-rich individuals who didn’t want to pay more in taxes. These wealthy folks got together to finance a campaign against the Fair Tax that was strong on specious rhetoric, but weak on factual accuracy. Effectively, the anti-Fair Tax crowd succeeded by convincing the general public to buy three fallacies.

First, they tricked people into believing the Fair Tax would somehow lead to higher taxes on the middle class, when the graduated rate structure was designed specifically to avoid that. The real kick in the head is now that the Fair Tax failed, any income tax increase made under Illinois’ flat rate structure will necessarily hit the middle class.

Second, they got folks to believe the Fair Tax would lead to taxation of retirement income, when it created no legal authority to do so more than already exist today.

Finally, they convinced people they shouldn’t trust Springfield to spend new tax revenue wisely, despite the fact 96 cents of every dollar spent on services goes to education, health care, human services and public safety. But why should facts get in the way of multimillionaires who want to avoid paying more in taxes to the detriment of everyone else?

• Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.

via Daily Herald

December 6, 2020 at 08:04AM

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