Illinois Rejected the Fair Tax. What's Next?
On November 3, the question of who would be elected president was not the only monumental decision facing Illinois voters. The Illinois Allow for Graduated Income Tax Amendment—known to its supporters as the “Fair Tax Amendment”—would have restructured the state’s personal income tax from a flat rate to a graduated system that would have taxed people with greater personal income at a higher rate. If it had passed, the amendment would have garnered an estimated $3 billion dollars more for the state’s yearly budget—no small feat for a state already hampered by a pension debt crisis and a loss of revenue from COVID-19.
However, Illinois voters rejected the amendment by a 53-47 percent margin. A variety of factors contributed to this rejection, including distrust of state government and fear that taxes on the middle class would rise. Now, Illinois must find an alternative way to balance its budget. Unfortunately, each of the remaining options will disproportionately harm poorer state residents, bringing more financial hardship amid an already crippling economic recession.
The Promise and Peril of A Graduated Income Tax
The Illinois Allow for Graduated Income Tax Amendment would have repealed the state’s constitutional requirement that any personal income tax be levied at a flat rate regardless of a person’s income. The state government passed a bill in June 2019 that would have forced the state’s income tax rate to adopt six graduated rates if the amendment passed in the 2020 election. Under those graduated rates, taxes would increase for the 3 percent of the state population making over $250,000 per year, while remaining the same or slightly decreasing for all other residents. This tax increase on wealthier state residents would have added an estimated $3 billion more per year to the state’s budget. Had it passed, Illinois would have joined 32 other states in levying a graduated personal income tax.
John Bouman was the chairman of Vote Yes For Fair Tax, a political action committee dedicated to passing the amendment. Bouman says the extra revenue from the amendment, had it passed, would have been crucial to state funding: “[The revenue] was desperately needed. It would have funded vital social services and helped get the state’s creditors taken care of... It would have made the income tax more responsive to the economy. If all of your income growth is captured [among the wealthiest] and you’re not taxing more there, then you’re not matching the natural growth of your economy” he told the Gate.
The amendment initially polled well with residents. A March 2020 poll found that 65 percent of Illinois voters favored the amendment. However, a combination of government distrust, anxiety over potential tax increases, and marketing defeated the proposal. In a series of editorials, the Chicago Tribune argued against the amendment, saying it would allow the state to eventually raise taxes on a larger portion of Illinois residents and that the amendment was a cash grab by the state that would not solve its underlying deficit problems.
Multi-million dollar marketing campaigns backed both the amendment’s supporters and detractors. Governor J.B. Pritzker himself contributed $56.50 million to the campaign in favor of the amendment. Kenneth Griffin, CEO of the Chicago-based hedge fund Citadel, contributed $53.75 million to the Coalition to Stop the Proposed Tax Hike, a political action committee opposed to the amendment. These donations funded a blitz of television ads before the election, with supportive ads emphasizing that only the wealthiest 3 percent would be taxed more, and negative ads arguing the amendment would open the door for middle class tax increases. In the end, it appears the opposition’s message found more resonance.
In a state with a sordid history of corruption, recent widely publicized allegations of corruption and harassment against Democratic House Speaker Michael Madigan may have also soured voters on the amendment. A 2016 Gallup poll found Illinois had the lowest level of voter confidence in state government in the country, with only 25 percent of Illinois residents expressing confidence in state government. Voters’ rejection of the amendment may thus have stemmed from distrust in the government to use the extra tax revenue wisely.
A State in Financial Crisis
Without the graduated income tax, Illinois must now find another way to address its financial crisis. The state faces a $6.2 billion shortfall in this year’s $42 billion budget. Loss of revenue from COVID-19 this year coupled with the amendment’s failure and Illinois’ pension debt crisis to exacerbate the state’s budgetary woes. As of fiscal year 2019, the state’s unfunded pension liability was $129 billion, an explosive increase from its $16 billion liability in fiscal year 2000.
“The fact is that we need the money. No one is disputing that, not even our opponents,” Bouman said of the state’s deficit. Even before the amendment was raised as an issue, he says the state has cut spending on social services in response to its ballooning debt. “We have completely gutted community mental health… Cook County Jail is the largest mental institution in the state because that’s where you put people when you don’t have state services. We have all but eliminated state-supported drug and alcohol treatment. State-supported job training is non-existent. When you think about why we have disparate racial outcomes, it comes back to this.”
The extra $3 billion from the graduated income tax would not have fully offset the state’s budget deficit. But without the amendment, Governor Pritzker has said that the state will need to cut spending even further, raise its flat tax rate, or pursue some combination of both changes to recuperate the loss.
Difficult Choices Ahead
While it is not certain what combination of spending cuts and tax increases the state will pursue, certain portions of the budget are more vulnerable to cuts than others. Ralph Martire is the Executive Director of the Center for Tax and Budget Accountability, a nonprofit organization which provides information and analysis on local, state and federal tax and budget issues, and which advocated in favor of the graduated income tax amendment. Martire said that, as the budgetary crisis has worsened over the past two decades, the state has cut programs in two key areas: higher education and human services.
“In 2002, before we started cutting spending on higher ed, state general fund grants covered 72 percent of the cost of a student attending a public university in Illinois. By 2019, state funding covered only 32 percent.” Martire told the Gate. The amendment’s failure may therefore signal another round of cuts for higher education spending.
Martire also says that the $6.9 billion allocated for human services—a broad term including mental health, child abuse and neglect services, disability assistance and many other services—is vulnerable to cuts. “Human services aren’t universally experienced by voters and taxpayers, whereas things like healthcare and public safety are, so these are seen as low-hanging fruit for cuts.”
Cuts to spending on higher education would disproportionately impact lower-income residents. In 2014, a low-income family in Illinois needed to set aside 63 percent of their income to pay for a student to attend a public four-year college, compared to 25 percent for students from median-income families. More cuts could further exacerbate this gap. When Illinois cut institutional aid for higher education in fiscal years 2016 and 2017, Chicago State University took the biggest hit, losing 65 percent of its budget from 2015. Chicago State University holds the largest proportion of low-income students and students of color among public Illinois universities.
While Pritzker has not identified a specific area of human services vulnerable for cuts yet, cuts to many of those areas would likely harm low-income residents more. People with disabilities and mental illness are overrepresented among America’s poor, and disabilities and mental illness services may be among those human services threatened with budget reduction if Martire’s worries come to fruition.
Pritzker has floated an option beside cuts: raising the state’s flat income tax from 4.95 percent, where it currently sits, to as high as 5.9 percent. However, even this increase would not take budget cuts off the table. And while some argue that a flat tax hike is fair because it levies the same income tax rate to all state residents, under the current system, the poorest 20 percent of Illinois residents pay 14.9 percent of their family income in taxes, while the richest 1 percent pay only 7.4 percent of their income. These rates come from a combination of income, property and sales and excise taxes at the local and state level. Hiking the flat tax would leave this gap unaddressed, but instead would ask for more taxes from Illinois’ already overburdened poorest residents.
As the pandemic’s second wave hits Illinois, slowing business once again and wreaking further economic havoc, the question of how to financially stabilize the struggling state remains. Without a graduated income tax, a painful flat tax increase or a series of spending cuts threaten the state’s most vulnerable residents.
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