Cutting Taxes for the Middle Class and Shrinking the Deficit: Moving to a Graduated State Income Tax in Illinois


April 30, 2018

This report makes the case for a graduated rate state income tax in Illinois, and illustrates two possible rate structures that would accomplish each of three major objectives:

  • Cut taxes for the bottom 98 percent of Illinois taxpayers;
  • Limit the top marginal rate to levels that already exist in the Midwest; and
  • Reduce the structural deficit by $2 billion in the first year of implementation

There are many ways to reach these objectives; the illustrations in this report are meant to show the feasibility of doing so, rather than prescribe any particular path.

In addition, the report will lay out several arguments for the urgency of passing a Constitutional amendment to allow a graduated rate state income tax in Illinois:

It is textbook capitalist policy that to be fair, a tax system should impose tax burden according to ability to pay--that is, it should impose higher tax burdens on affluent households than it does on low- and middle-income households, when tax burden is measured as a percentage of income. Illinois fails this basic standard of fairness, in large part because of its flat rate state income tax.

Illinois' unfair, flat rate income tax contributes to structural deficits. This is because a flat rate income tax cannot-by design-respond to the significant growth in income inequality that has occurred over the last three decades. This in turn has forced decision makers to underfund or cut the core public services of education, healthcare, human services, and public safety, which collectively account for over 90 percent of all General Fund spending on current services.

Illinois' unfair, flat rate income tax harms the private economy. Overtaxing low- and middle-income families, who are both good spenders and have flat to declining real incomes over time, reduces their consumer spending. The research shows that for every dollar the state cuts in General Fund spending on current services, the private sector loses an average of $1.36 in economic activity. Since most General Fund spending on core services covers the wages of the teachers, social workers, health care professionals, correctional officers, and other workers who provide public services, when Illinois' structural deficit compels the state to reduce spending, it is for the most part cutting the earnings of these workers.

Illinois' flat income tax rate is out of the mainstream. Of the 41 US states that impose an individual income tax, Illinois is one of just eight that impose the same flat rate on the income of all earners, regardless of how much they make or their ability to pay.

The two illustrations of possible rate structures in the report both use a graduated rate structure to impose higher tax burdens on higher levels of income to raise much-needed revenue. They differ in the mechanism used to deliver tax relief to the bottom 98 percent of Illinois taxpayers.

One illustration creates a $300 tax credit that would be applied to the state income tax bill of all filers with $200,000 of taxable income if filing jointly and $100,000 of taxable income if filing singly. The credit would also give tax relief on a decreasing basis to tax filers making up to $300,000 if filing jointly and $200,000 if filing singly.

The other illustration simply cuts the marginal state income tax rate for the first $100,000 of taxable income for all filers from 4.95 percent to 4.50 percent. Between $100,000 and $300,000 of taxable income, the rate would remain the current 4.95 percent.

Both scenarios give 98 percent of Illinois taxpayers-those making less than $300,000 in taxable income-a tax cut, or in the case of single filers making between $200,000 and $300,000 in the credit illustration, no tax increase.

Topics:Tax and Budget, Illinois Budget, Income Tax, Revenue Policy

Tags:Graduated Income Tax, Income Tax, Personal Income Tax, State Revenue