A Graduated Income Tax Could Save Illinois

Illinois’ budget crisis can be resolved by raising taxes on the rich and cutting taxes for low-income and middle-class families, according to a new Policy Brief by the Illinois Economic Policy Institute (ILEPI).

The memorandum corroborates recommendations by the non-partisan Civic Federation, the research-based Institute of Government and Public Affairs at the University of Illinois, and the bi-partisan Center for Tax and Budget Accountability that a graduated income tax system could put Illinois on sound financial footing.

Read the full report here: ILEPI Policy Brief – Independent Analysis of Graduated Income Tax

The report evaluates a proposal by State Representative Lou Lang (D- Skokie) to cut taxes for the vast majority of Illinois taxpayers while implementing a relatively high tax rate for rich individuals earning $500,000 or more per year. Proponents of Lang’s graduated income tax structure have contended that the proposal would provide a tax cut for 99 percent of Illinois taxpayers while simultaneously raising as much as $1.9 billion in additional revenue for the state.

The Illinois Economic Policy Institute’s independent analysis generally aligns with, but is slightly more conservative than, these estimates. ILEPI forecasts that Representative Lang’s graduated income tax would generate $1.46 billion in additional state tax revenues and would save or create over 16,000 total jobs. This includes a minimal employment loss from higher taxes on the rich, but also the thousands of state government jobs that are saved as a result of funding public services. Because poorer workers spend a larger share of their incomes back into the economy, the tax cuts to low-income and middle-class taxpayers contribute to positive job gains.

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Representative Lang’s proposal, however, may not go far enough. The $1.46 billion in additional revenues would only cover about one-fourth of the $5.60 billion budget deficit facing Illinois next year.

The Illinois Economic Policy Institute also proposes an alternative graduated income tax in the Policy Brief.

ILEPI’s proposal would effectively eliminate state income taxes on all earned income below the federal poverty line. Additionally, while the top marginal tax rate in Representative Lang’s bill is 9.75 percent, ILEPI’s proposed top marginal tax rate is 7.0 percent – below the top tax rates in Wisconsin (7.65 percent), Iowa (8.98 percent), and Minnesota (9.85 percent).

ILEPI’s proposal would cut income taxes for 75 percent of Illinois taxpayers and raise them for the Top 25 Percent. The proposal would be expected to generate $3.63 billion in additional revenues per year, closing much of the budget deficit. With more money in the pockets of workers who need it most and a better financial outlook, ILEPI’s rates would save or create nearly 37,000 jobs and grow the state economy by 0.5 percent.

Critics argue that a graduated income tax that raises taxes on the rich would harm the economy and make “job creators” leave the state. But there is no evidence to support this claim.

In fact, the actual experience of Minnesota provides an objective that counters the critics. In 2013, Minnesota’s top income tax rate on the rich was increased from 7.85 percent to 9.85 percent. The state has also raised its minimum wage to $9.00 per hour, higher than all Midwestern states. Despite near-apocalyptic cries that jobs would be lost, Minnesota has the fifth-fastest growing economy in the nation and now has a lower unemployment rate (3.7 percent) than Iowa, Wisconsin, Indiana, Missouri, Kentucky, and (of course) Illinois.

Claims that increasing taxes on the rich and raising the minimum wage would result in job loss were not only exaggerated – they were wrong.

Lawmakers in Illinois should learn from this experience.

The alternative is another hike in the flat income tax rate, probably back to 5.0 percent. Without an amendment to the Illinois Constitution, a 5.0-percent flat income tax may be a necessary sacrifice. The 5.0-percent flat tax, however, is burdensome for low-income taxpayers and hampers economic activity. While the increase would generate $4.00 billion more in needed tax revenues, it would result in over 54,000 jobs lost in Illinois – because it would be a tax hike on every Illinois taxpayer, reducing consumer demand for all income groups.

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A graduated income tax system can make the state’s tax code fairer, can fund essential public services, and can grow the economy. Proposals by Representative Lang and the Illinois Economic Policy Institute are both better options than a flat tax increase. The state should pass a constitutional amendment to implement a graduated income tax structure that works for Illinois.


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