Behind The Failure Of The Graduated Income Tax

May 4, 2016

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Despite recent hype over the possibility of legislators putting questions on the November ballot to change the constitution, the Illinois House adjourned Wednesday without even voting on proposed amendments. Their lack of action means voters won't be asked whether they want to change how they're taxed.

On Tuesday, all systems were "go" for a plan to dramatically change how Illinois can tax its residents.

The constitution now - literally - requires income be taxed at a "non-graduated rate." As in, the same flat rate, no matter how much money you make.

Rep. Christian Mitchell was confident he had the votes to strike that line. That way, Illinois could tax wealthier people, at a higher rate.

Then, he says, "we started hearing rumblings that the governor's office was starting to intervene."

By Wednesday morning, he says, came word that legislators he'd thought were on board weren't any more.

"When you do something as large as changing tax policy, you want it to be bipartisan. And we had three Republican members who were ready to vote for the bill, and, you know, Bruce Rauner sort of reached in and turned off the switch. And that was the end of the proposal."

Rather than asking legislators to vote for a politically risky measure he knew would die, he decided not to call it at all.

Mitchell won't say the names of those Republican legislators.

And Gov. Rauner's office didn't directly respond to a question on whether it pressured them. But the governor made clear in the primary that he'd use his massive campaign fund to go after even members of his own party that strayed from his agenda. Wednesday morning, Rauner's Dept. of Revenue put out a study that says in 4 years' time, a graduated income tax would lead to a loss of 20,000 jobs, chase more people out of Illinois, and cost the state billions in productivity.

Critics have big questions about the methodology, and say the revenue department went out of its way to use a flawed model to reach that conclusion.

But the figures match with the point the governor's been making. "If we go to a graduated income tax, that will quickly spike up and put our income tax among the highest in America," he said earlier this week. "And that will be devastating to recruiting companies and growing our economy. And if we put a high income tax on successful people -- business owners, small business owners -- many more will leave. Many more than have already been leaving. It will be devastating to our tax base."

That's the sentiment of Illinois' business community too. Many small businesses pay the personal, not the corporate, income tax, so a graduated income tax could have hit them, not just :the millionaire next door".

The proposal itself wouldn't have set any tax rates; it would have just opened the doorway to a progressive structure.

But advocates had a package of rates drafted, and set to go, which was designed to target only the wealthiest of Illinois residents.

They say more than 99 percent of filers would have actually seen their tax bills cut.

"That's as it stands right now, but you push that forward. Those rates don't move, they're set in state statute, and over time that is an income tax on everyone as incomes rise, and we all want incomes to rise, and this would be counterproductive to that in the long run," said Rep. Grant Wehrli, a Republican who represents suburban Naperville.

Wehrli says he wasn't going to vote for the graduated income tax anyway, as it wouldn't have been good for his constituents. Of course, any sort of tax increase -- even only on the wealthy -- would have brought in more revenue to the state's strained coffers.

Something that Springfield hasn't shown an appetite for, but which even Gov. Rauner says he's open to, and which most observers say needs to, and will, happen at some point.

Senator Don Harmon, a Democrat from Oak Park, says lawmakers' options will be constrained when that time comes.

"It means that we're going to have to deal with tax rates that tax a working family with $25,000 in taxable income the same as we tax a family making $60 million a year. Fundamentally unfair, but it's the only tool that we have." A family making $60 million a year, happens to be roughly how much Gov. Rauner made in recent years, according to the tax returns he's released.

House Speaker Michael Madigan's spokesman Steve Brown says by standing in the way of a graduated income tax, Republicans favored millionaires over school children.

"So it's a clear win for the one-percenters, and the people in the legislature who are their best representatives," Brown said.

But if Madigan really wanted, he - theoretically at least -- should have been able to make it happen. The governor's spokeswoman says Democrats have a super-majority in the House, which means "they have the ability to pass whatever kind of tax increase they want."

It's not just the graduated income tax question that failed to muster General Assembly support. Despite a flurry of last-minute activity, it looks like voters could have a relatively light load when it comes to deciding whether they want to alter the Illinois constitution, as time is running out for legislators to add any constitutional amendment questions to the November ballot.

Several other constitutional amendments won't make it on the November ballot: A proposal to eliminate the lieutenant governor's office was voted down, competing legislator-driven visions for changing how their districts are drawn are stuck, and Speaker Madigan never called his plan to guarantee schools get more money.

The House did approve a question that would secure dollars for transportation needs; it'll make it to the ballot if three-fifths of Senators do the same on Thursday.