Gov. J.B. Pritzker’s estimate of how much his progressive tax proposal would put into state coffers fails to consider that some people will take steps to avoid paying more in taxes, leading to a budget shortfall estimated to be in the billions, according to opponents of the governor’s tax plan.
Pritzker estimated that his proposed tax rates would raise an additional $3.4 billion, largely from a higher rate on millionaires and marginally higher rates on people and small businesses making more than $250,000.
Illinois Policy Institute Chief Economist Orphe Divounguy estimated the proposal would only bring about $1 billion because of the reality that people and businesses would take steps to avoid paying more in taxes, such as increasing itemized deductions to lower their reported income rate.
The proportional rates, he said, would have to start at 5.19 percent for income under $10,000 and increase to a top rate of 8.69 percent to earn $3.4 billion.
“The only way to get to $3.4 [billion] would be to actually implement higher taxes, not just on the rich but on the middle class,” he said.
Mark Glennon, founder of the financial site Wirepoints, also said Pritzker’s estimate doesn’t account for taxpayers who won’t be high-earners every year, something he says will make the state’s budget much more volatile.
“It doesn’t pass the smell test,” he said. “It doesn’t account for changes in behavior and tax planning that people always go through when they face a tax increase.”
Divounguy said that the economic disincentive will increase poverty as it did in Connecticut after lawmakers enacted a progressive tax in 1996.
“Production will slow because fewer jobs are being created, meaning those who are struggling to get by will suffer,” he said.
Connecticut’s poverty spike happened as the nationwide rate was in the middle of a drop from 15 percent to 11 percent in 2000, according to U.S. Census data.
Both said Pritzker’s proposal to scrap the progressive nature of the tax on income above $1 million will be a strong incentive for those earners to take measures to report less income. Reporting the $1,000,001st dollar in taxable income would trigger a provision that would remove the progressivity of the income tax and subject the entirety of the income to Pritzker’s top proposed rate of 7.95 percent.
Pritzker’s office didn’t respond to questions about the estimate. Think Big Illinois, a nonprofit funded by Pritzker, responded to criticism.
“Today’s proposed tax rates are an important step toward creating a fair tax system that works for everyone, so it shouldn’t come as a surprise that outside groups funded by the wealthiest Illinoisans are quick to launch desperate, false attacks,” said Quintin Fulks, executive director and former Pritzker campaign operative. “While these outside groups and their wealthy donors will do or say anything to avoid finally having to pay their fair share, the fact is Illinois needs a fair tax to modernize our tax code, boost the economy, and address the dire financial situation we’ve been left in after years of irresponsible governance and mismanagement.”