Should Illinois have a graduated income tax?

The Illinois legislature certainly thought so, and so did the governor, a little more than eight decades ago. Facing decreased revenues as spending pressures mounted, a special session of the Depression-era 57th General Assembly approved a graduated tax on net incomes, and Gov. Louis L. Emmerson, a Republican, signed the measure into law February 22, 1932.

Within months, however, the Illinois Supreme Court killed the new income tax, ruling that its graduated rates violated the revenue provisions of the 1870 Constitution.

Still desperate for a revenue source to replace the exhausted statewide property tax, the legislature in 1933 passed and Democratic Gov. Henry Horner signed a new retailer’s occupational tax, familiarly known as the state sales tax, which eventually passed constitutional muster.

Fast forward to spring 2012. Illinois again faces enormous financial challenges as Gov. Pat Quinn and lawmakers attempt to craft a budget for the coming fiscal year in which just pension and Medicaid costs alone will increase by billions of dollars, while revenue growth — chiefly from income and sales taxes — will reach only hundreds of millions.

To help close the gap, the governor wants to slash $2.7 billion from Medicaid spending, close prisons and institutions serving the developmentally disabled and mentally ill, slice funding for adoption and foster care services for abused and neglected children, slash money for HIV/AIDS programs and breast, cervical and prostate cancer screenings, zero out some addiction prevention services — the list goes on.

Against this backdrop, the old notion of a graduated income tax takes on new relevance in the wake of a recent study by a Chicago think tank that suggests graduated rates could be structured to:

• Cut the overall income tax burden for the 94 percent of state taxpayers whose base income is less than $150,000.
• Raise some $2.4 billion annually in new revenue.
• Create tens of thousands of new private sector jobs through increased consumer and public spending.

The report, The Case for Creating a Graduated Income Tax in Illinois, was released in late February by the Center for Tax and Budget Accountability, a Chicago-based, nonpartisan research and policy analysis operation.

Coupled with other state and local taxes, Illinois’ current rate — a flat 5 percent on all taxable income — results in a heavier overall burden on low- and middle-income families than on more affluent taxpayers, according to the center. At the same time, the existing structure does not raise enough revenue to pay for existing services into the future, the report said, guaranteeing that the state’s budget problems will persist.

Moreover, Illinois’ flat-rate tax is out of step with most of the 40 other states that impose income taxes. Only six others — including Indiana — tax everyone’s income at the same rate. The other 34 — including Wisconsin, Iowa, Missouri and Kentucky — impose higher marginal rates on larger incomes.

In fact, the report noted Illinois would be on much more solid ground if its income tax rates were the same as most of its neighbors — taking in $1.7 billion more under Kentucky’s graduated structure, $1.9 billion more with Missouri’s, $3.6 billion more with Wisconsin’s, and a whopping $6.3 billion more if the Prairie State had Iowa’s graduated income tax rates, which top out at 8.98 percent for the highest incomes. And in all cases, more than half the state’s families, those on the lower end of the income ladder, would pay less in taxes, according to the center study, and instead would buy more goods and services, stimulating job creation in the private sector.

But before the income tax can be revamped, the 1970 Illinois Constitution would have to be amended because its Revenue Article says flatly, “A tax on or measured by income shall be at a non-graduated rate.”

The constitutional language reflected a compromise of sorts among convention delegates, a great number of whom wanted no language limiting the legislature’s taxing powers, reasoning that future events might require leeway beyond limits deemed advisable in 1970. Others, though, wanted to include a ceiling on income tax rates, such as 5 percent, to protect future taxpayers. 

In the end, the delegates opted to reflect the status quo, writing into the charter the general terms of the state’s first income tax enacted a year earlier: flat rates for individuals and for corporate taxpayers, with the corporate rate not to exceed the individual rate by more than the 8-to-5 ratio embodied in the new law. At the time, the rates were 4 percent for corporations and 2.5 percent for individuals.

Since the new charter’s ratification in December 1970, lawmakers from time to time have tried to strike the ban on graduated rates, with no success so far. But the push has intensified in recent years. From 1971 to 2007, 14 amendments to allow graduated rates were introduced, only to die in committee. Since then, another 14 have been offered, and two actually made it to losing floor votes, both in 2008. A Senate proposal garnered only 19 favorable votes while 35 senators voted no, while a more narrowly drawn House plan to increase rates on incomes above $100,000 was rejected 52-60. 

On both roll calls, only Democrats voted for the amendments, while all Republicans and a couple dozen Democrats were opposed.

Currently, proposed amendments to allow graduated rates have been offered in both the Senate and the House, with an early May deadline for approval by three-fifths majorities in both chambers — 36 senators and 71 representatives — needed to put the question before general election voters in November.

As lawmakers struggle with budget-making heading to their planned May 31 adjournment, center president Ralph Martire’s advice is worth heeding. “One of the best policy options available to address the state’s ongoing general fund deficit problems ... is to pass a constitutional amendment permitting the use of a graduated income tax rate structure,” Martire said when the center released the study.

“In one fell swoop, a well-designed graduated income tax could simultaneously stimulate job growth in the state, tax people more fairly and reduce general fund deficits.”

Charles N. Wheeler III is director of the Public Affairs Reporting program at the University of Illinois Springfield.

Illinois Issues, April 2012