On Thursday, Illinois House Speaker Michael Madigan proposed a 3 percent “additional income tax” constitutional amendment for earners with incomes over $1 million. Currently, Illinois’ income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate is 5 percent for all income levels, and, according to current law, it is scheduled to fall to 3.75 percent on January 1, 2015.
Illinois has been debating progressive income tax proposals for some time now, with previous proposals including top rates ranging from 9 percent to 11 percent. Illinois’ current flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. is protected by the state’s constitution, and thus a move to a progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. would require a supermajority of the legislature and a referendum in November. The tax increase would be retroactive to January 1, 2014.
Madigan’s plan differs from others in that it ties a rate proposal to the progressive tax constitutional amendment and dedicates the revenues to public services. Other tax increase proposals in Illinois have not tied the constitutional amendment’s passage to a specific rate structure: they’ve proposed amendments giving broad powers to Illinois policymakers to make a progressive income tax at their discretion, and left rate structures vague. Madigan’s proposal specifically sets a 3 percent additional rate above the normal income tax rate and ties revenue raised from the tax to school districts to be distributed on a per pupil basis.
With numerous tax plans floated for Illinois, it’s not clear what the final plans put before voters may be. Governor Quinn will deliver his budget address on March 26th, where presumably his tax plan will be laid out. But whatever the case, a “millionaires’ tax” is poor policy: it is a narrow, high-rate tax on a highly mobile group of people who earn less in bad economic times. The spending such a tax increase supports leads to the cost of government being hidden from most people and shouldered by a few, making revenues even more volatile and narrowly-based.
It’s true that high-earner taxes will can raise revenue in the short term, but eventually, the taxes can negatively impact location decisions. Illinois is already struggling to keep many of its prominent companies and experiencing slower than average job growth. With a higher tax on individuals and many businesses, people expanding old businesses or creating new ones will incorporate the higher cost of doing business into their decision-making, and could choose to steer clear of the state.
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