What is Madigan planning for the income tax?
Reform groups on both sides want change
UPDATE: On Thursday afternoon, Madigan announced a plan to tax personal income over $1 million at an extra 3 percent, bringing the effective rate for people earning more than $1 million to 8 percent. Individuals with income under $1 million would continue to pay the current rate of 5 percent, although that rate is scheduled to decrease in January 2015 to 3.75 percent. Madigan expects the measure to raise an additional $1 billion yearly, which would go toward education funding. The plan would require a constitutional amendment.
“Over the last several years, every area of Illinois has experienced school closures, teacher layoffs and classroom cuts due to reduced education funding that has been forced by a crowding out of state revenues,” Madigan said. “This is not a complete solution to our education funding issues, but it is a fair and equitable way to reverse a decline brought on by the national economic problems and will help address a number of spending pressures that vary among school districts.”
One thing is certain: no one is happy with the current state income tax.
Conservative groups like the Illinois Policy Institute say the income tax increase of 2010 should be allowed to expire, while the officially nonpartisan but more liberal Center for Tax and Budget Accountability wants Illinois to switch from a flat percentage income tax to a graduated tax. Although the tax increase has helped slow the growth of the state’s deficit, it hasn’t raised enough revenue to catch up on the state’s missed pension fund payments. Something has to change, and it looks like House Speaker Michael Madigan is preparing for action.
Early this year, Madigan created four new subcommittees within the House Revenue and Finance Committee. He placed in charge a trusted lieutenant, Rep. John Bradley, D-Marion, who has negotiated legislative action on several contentious issues in past years – most recently on the high-volume hydraulic fracturing bill that passed in June 2013. The creation of the committees may signal that Madigan’s House is planning a move on taxes, but until the subcommittees make recommendations, it’s tough to tell what may happen.
The subcommittees deal with the income tax, the state’s business climate, the state sales tax and “other” taxes. In a series of hearings held over the past two months, lawmakers on the subcommittees have heard testimony from business groups, academics, taxpayer groups and others. While the various groups haven’t all agreed on what should be done, their combined testimonies make clear that the current tax structure is in need of reform.
While business groups like the idea of cutting taxes and other groups want to see the tax structure changed, the Chicago-based Civic Federation suggested earlier this month that Illinois gradually roll back the temporary income tax increase rather than let it expire in January 2015. The group also suggested taxing retirement income. Illinois is one of only three states that don’t tax pension income, and one of 27 states that don’t tax Social Security payments.
During the tax policy hearings, Ralph Martire, executive director of the Chicago-based Center for Tax and Budget Accountability, said that while Illinois’ spending has increased in the past 15 fiscal years in total dollar amounts, spending has actually decreased since FY2000 after being adjusted for inflation and population growth. Although the state spends more dollars now, Illinois’ buying power with those dollars has decreased, and each Illinois resident gets less for their tax dollars.
Additionally, Martire pointed out that the state’s three-year fiscal outlook predicts the state heading toward a “fiscal cliff” in which revenue and spending are mostly stagnant while the backlog of bills continues to grow by billions of dollars each year. Because of those looming problems, Amanda Kass, budget director and pensions specialist with CTBA, said she doesn’t expect lawmakers to allow the tax increase to expire.
“I think it’s becoming very clear that just allowing tax rates to expire is not going to be a viable option because the loss of revenue is too great,” Kass said. “Yes, the tax increase is supposed to expire in January 2015, but I think the writing on the wall is that it’s not really going to happen.”
CTBA instead proposes changing Illinois’ flat percentage income tax to a graduated tax in which higher earners pay a larger percentage of income. It would require a constitutional amendment because the state’s flat-rate income tax is written into the current state constitution.
“The point of a graduated rate is you have greater flexibility to design a system that is fair to taxpayers and also provides adequate revenue for the state,” Kass said.
The Illinois Chamber of Commerce, Illinois Manufacturers’ Association, Taxpayers’ Federation of Illinois and the American Legislative Exchange Council – known as ALEC for short – told lawmakers that cutting individual and corporate income taxes would spur economic growth and create jobs. They reason that taxes act as a disincentive for productive work.
“What this means is that people are less willing to go to the trouble engaging in work over leisure or taking the risk of investment over income consumption, the more they are taxed,” said William Freeland, a research analyst at ALEC. “This lowers economic activity and harms economic growth.”
While CTBA is attempting to directly address the state’s fiscal condition, the business groups instead seek to improve the economy and let that indirectly improve the state’s finances.
“The big question is what goal we’re trying to address,” Kass said. “Is it fixing the state’s fiscal system, or is it addressing Illinois’ economy? Those are two different things and would have two different policy recommendations. They don’t necessarily have to conflict, but they’re sort of two sides of a coin.”
Contact Patrick Yeagle at email@example.com.