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Most of Illinois is paying too much in taxes. A progressive income tax can fix that.

Crain's Chicago Business

Monday, April 15, 2019  |  Article  |  Frank Manzo IV

Taxes, income (86)

As winter gives way to spring, millions of Illinois residents are filing their annual state income taxes.


And even though Illinois has far less revenue that it needs, most of its taxpayers are paying far more than they should.


The reason is because, unlike neighboring states such as Iowa, Minnesota and Wisconsin, Illinois forces working and middle-income families to shoulder a disproportionate share of its state tax burden.


Under Illinois’ “flat-rate” tax scheme, a person earning $50,000 per year pays the same tax rate as someone who makes $50 million. Once exemptions and carve outs are factored in, the average working-class Illinois resident is actually paying a higher percentage of his or her income in state taxes than the person making $50 million.


This is not hyperbole, but how our current system works.


From there, it triggers a mutually-reinforcing cycle that makes matters worse. First, because millionaires and billionaires aren’t paying their fair share, state government doesn’t have enough money to meet its responsibilities to fund schools, fix roads, deliver core services, or pay down debts. In turn, this causes state and local governments, desperate to avoid insolvency, to raise revenue in other regressive ways— like increasing sales taxes or raising local property taxes.


A far simpler and fairer solution is to adopt a progressive income tax system, which is already in place at the federal level and in 33 other states, including most of the Midwest. It would replace Illinois’ current flat-rate scheme with a structured-rate progressive income tax. Under this change, the CEO who makes $5 million a year would pay a higher rate. Nearly everyone else who make less would pay a lower rate.


Turns out, the math works far better as well. According to a new study by the Project for Middle Class Renewal at the University of Illinois and the Illinois Economic Policy Institute, replacing the current flat tax with a progressive income system would not only mean more money in the pockets of the vast majority of Illinois taxpayers, it would mean billions of dollars in additional revenue for state government.


How much additional revenue? It depends on the rates, but a conservative estimate would range between $3 billion and $5 billion per year. Here’s what that money could do.


For starters, it could eliminate Illinois’ $1.2 billion annual structural budget deficit in its entirety. Gone. Next, it could fully fund a 10% cut in local property taxes for the average homeowner in Illinois. Third, it could enable the state to invest another $250 million per year in both education and infrastructure improvements. And, under certain scenarios, there would still be money left over to pay down unfunded liabilities and accrued state debt.


In addition to cutting property taxes for every Illinois resident, the research shows that this type of system would reduce income tax burdens for between 67% and 97% of Illinois taxpayers by hundreds of dollars per year. As noted in our report, the new system could also be structured to cap rates for business partnerships and S corps, protecting the bottom lines of our small businesses.


A progressive income tax is also better for the economy. Under this system, Illinois’ could grow by $1 billion to $8 billion and generate thousands of new jobs. Why? Because working and middle-class families are more likely to spend their tax cuts in the economy, and additional state investments in education and infrastructure are proven tools for creating broad-based prosperity. This has been borne out in real-world experience: Of the eight

states that recently raised income tax rates on the wealthy and invested in education and infrastructure, five had faster economic growth and seven had better per-capita income growth than their neighbors.


The alternative is to do nothing and keep forcing middle-class taxpayers to shield the wealthiest in our state from paying their fair share. How’s that been working out again?


Frank Manzo IV is policy director of the Illinois Economic Policy Institute, and Robert Bruno is director of the Project for Middle Class Renewal at the University of Illinois at Urbana-Champaign. Click here to read their peer-reviewed research on the impact of enacting a progressive income tax in Illinois.