Illinois Gov. J.B. Pritzker brought out union leaders and an online tax calculator as he continued to promote his plan to change the state’s flat income tax to a progressive one that he calls a “fair tax.”
The nonpartisan Tax Foundation has said the plan will make Illinois’ less competitive nationally in terms of taxation.
At a news conference in Chicago, Pritzker said there are three options to address the state’s structural financial problems: Across the board budget cuts of 15 percent, raising the state’s flat income tax for everyone, or his plan.
“And the third is to implement a fair tax where people who are wealthier pay more, people who are less wealthy pay less,” he said.
Pritzker said 97 percent of taxpayers will get a cut under his plan. He also unveiled a tax calculator to show taxpayers how much they will save.
Pritzker’s plan would push Illinois to near the bottom of the Tax Foundation’s rankings of state business climates. The state most recently ranked 36th in the nation in tax competitiveness. If the governor’s plan was approved, the state’s ranking would fall to 48th, said Jared Walczak, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation.
Walczak said Pritzker’s plan will affect the small businesses that employ nearly half of Illinois’ workers.
“So when we look at taxes that are going to rise for probably somewhere near 80 percent of all of the small business income in the state, that’s a significant issue,” Walczak said. “Illinois already ranks 46th in the nation for private sector job growth. You can’t get a whole lot worse on the rankings, but you can get a whole lot worse in the real raw numbers and that becomes a concern when you’re going to see tax increases on most small business income and sometimes very substantial tax increases.”
Under Pritzker’s personal income tax structure, those making up to $10,000 a year would pay 4.75 percent in income taxes, down from the existing flat rate of 4.95 percent. Those earning up to $100,000 would pay an effective tax rate of 4.90 percent. Those earning between $100,001 and $250,000 would pay the current effective rate of 4.95 percent.
From there, the rate jumps nearly 3 percentage points to 7.75 percent for those making up to $500,000. Individuals and small businesses earning more than that would pay an effective rate of 7.85 percent. And those with income above $1 million would pay the state 7.95 percent on all earnings.
Walczak said with Illinois’ Personal Property Replacement Tax, the rates would be even higher for businesses. Corporate income would be taxed at 10.45 percent, the third-highest rate in the nation, and pass-through business income would be taxed at a top rate of 9.45 percent, the fourth-highest rate in the nation, he said.
Critics have said raising $3.4 billion in taxes without budget cuts could mean that lawmakers will have to raise those progressive income tax rates in the future. Pritzker told reporters that while there was no guarantee rates would stay the same, he said democracy itself would serve as the moderator on taxes.
“Nothing stops the past legislators and governors from changing the taxes in the state or going forward changing the taxes in the state,” Pritzker said.
He said he’s at least putting his rate proposals out there.
Walczak said that won’t fix Illinois’ troubled finances.
“If you provide this additional new tax authority and do nothing on the other side, I worry that they’ll be back at the table in the next couple of years with a much higher rates,” Walzak said.
As of Tuesday, Illinois has more than $8.4 billion in backlogged bills to vendors and other service providers. The state is also grappling with more than $134 billion in unfunded public employee pension costs. That doesn’t include the tens of billions in public employee retiree healthcare costs.
Pritzker’s proposed budget for the coming fiscal year doesn’t include increased revenue from a progressive tax, but still spends more than any previous state budget. A progressive tax would require a constitutional change approved by three-fifths of the voting public. Voters could see a constitutional amendment on the ballot in November 2020, at the earliest.
Republicans like state Rep. David McSweeney said the state needs to reduce Medicaid costs, reduce the state’s pension benefits to retirees, and cut spending across the board.
Pritzker said his weekend meeting with credit ratings agencies went well and said they are encouraged the state is on the right path. Those agencies have kept the state’s credit rating just above junk status. The agencies rate how likely bondholders are to get paid on their investment.
Illinois already has the highest state and local taxes in the nation, according to a new report Tuesday by consumer finance website WalletHub.
In WalletHub’s review of taxes in every state, Illinois’s overall effective state and local tax rate was ranked No. 51. The income tax was ranked no. 39, real-estate tax No. 50 and sales and excise taxes No. 25.
Among other findings, WalletHub found 89 percent of people surveyed across the country “think the government currently does not spend their tax dollars wisely.”