Tiff over taxes
Lawmakers, analysts mull a change in how Illinois generates revenue
Though they disagree on just about everything else, Ted Dabrowski and Ralph Martire agree on one thing: Illinois’ poor fiscal condition offers an opportunity to make the state better.
For Dabrowski, vice president of policy for the Illinois Policy Institute, that opportunity is a chance to spur business investment by letting the state’s 2010 income tax increase expire and drastically cutting state spending. But Martire, executive director of the Center for Tax and Budget Accountability, sees it as a chance to make the state’s tax system more fair and effective by swapping Illinois’ flat income tax for a graduated or “progressive” income tax.
The two men debated the merits of the progressive income tax last week at the Hoogland Center for the Arts during a public forum held by the Citizens Club of Springfield and advocacy group Reboot Illinois.
The income tax increase which took effect at the start of 2011 was ostensibly supposed to be a temporary measure to help Illinois pay off debt and prevent cuts to services like education, health care and public safety. Illinois’ current individual income tax rate of 5 percent is scheduled to drop back to 3.75 percent on Jan. 1, 2015.
When the increase was approved, lawmakers assumed they would have the options of letting the tax expire, making it permanent or enacting a new increase. The progressive tax proposal has gained traction since then, offering a fourth option that proponents say would ease the burden on lower income earners while raising more total revenue. Opponents say it would be a tax increase in disguise – one that drives businesses and people out of Illinois.
At the Hoogland debate, IPI’s Ted Dabrowski explained what his group sees as the reason for Illinois’ fiscal condition: spending has grown out of control.
“Illinois has a spending problem,” Dabrowski said. “It spends, it spends, it spends, and it doesn’t know how to stop. Since it doesn’t know how to stop, it borrows, and when it’s borrowed as much as it can, it goes into the taxes.”
But Ralph Martire, the CTBA head, disputed Dabrowski’s explanation, saying that while the total state budget has increased, spending on core services has actually decreased. The increase, Martire says, came from paying back loans Illinois previously took out. Those loans were taken to “paper over” the fact that the cost of providing services has risen more quickly than the amount of tax revenue – what Martire calls the “structural deficit.”
Illinois’ pension underfunding could easily be solved, Martire said, by enacting a progressive tax and revising the “ridiculous” pension funding ramp that artificially increases Illinois’ payments by billions of dollars each year.
Martire several times jabbed at IPI’s calculations regarding state finances, saying his own group’s numbers came from “a thing called math” instead of “some funky proprietary model.” He even quoted a passage from Adam Smith, the father of modern economics and a figure beloved by many conservatives.
“The goal of taxation should be to remedy inequality of riches as much as possible by relieving the poor and burdening the rich,” Martire said, quoting Smith’s Wealth of Nations.
Currently, the flat income tax system is enshrined in the state constitution, meaning a progressive tax would require a constitutional amendment. That can only happen with a three-fifths majority vote in both chambers of the Illinois General Assembly. While a handful of bills have been introduced to amend the constitution to allow a progressive tax, none have attempted to set tax rates under such a structure.
Martire’s CTBA claims a progressive tax could be designed to cut taxes for 94 percent of taxpayers – those making less than $150,000 per year – while raising $2.4 billion in additional revenue. CTBA claims that could be accomplished while keeping the “effective tax rate” for millionaires at only 4.3 percent. The effective tax rate accounts for all deductions and tax credits, as opposed to the “marginal tax rate,” which only measures percentage of gross income taken as tax.
Currently, 34 states have progressive income taxes, while seven have flat income taxes. Nine states have no income tax at all, relying instead on sales tax, use tax, property tax and other revenue.
Contact Patrick Yeagle at email@example.com.