On November 3^rd, 2020, Illinois voters will have the opportunity to ratify the proposed amendment to the Illinois Constitution that would eliminate the mandate that state income taxes be assessed using only one flat rate.

This is a crucial moment for Illinois since it has historically been, and currently remains, one of the most unfair taxing states in the nation. From a textbook standpoint, an “unfair” tax system is a regressive tax system—that is, one that imposes a greater tax burden on low- and middle-income families than on affluent families, when tax burden is measured as a percentage of income.  It is unfair because such a system fails to allocate tax burden in a manner that correlates with ability to pay, thereby worsening the substantial growth in income inequality that has occurred in the private sector over the last four decades. But building fairness into a state tax system is difficult, given that every tax—or fee for that matter—which is available to fund public services provided at the state or local level is regressive except for one: the income tax.  The income tax is the only tax that can actually be designed to comport with ability to pay and hence create some tax fairness, because it is the only tax that can be designed to assess higher tax rates on higher levels of income, and lower rates on lower levels of income.

Unfortunately, Article IX, Section 3 of the Illinois Constitution mandates that the state income tax be imposed at one flat rate across all levels of income. Hence, Illinois is constitutionally prohibited from utilizing the income tax to play the essential tax policy role of offsetting the natural regressivity of every other tax and fee imposed at either the state or local level. In fact, Illinois’ inability to build some fairness into its tax system through implementation of a graduated rate income tax has played a major role in driving the ongoing deficits in the state’s General Fund, while also hampering private sector economic growth.  The good news is a genuine opportunity for meaningful reform of the Illinois income tax now exists. That is because on June 5, 2019, Governor Pritzker signed Public Act 101-0008 (“P.A. 101-0008”) into law. If implemented, this legislation will create a new, graduated rate income tax structure, frequently referred to as the “Fair Tax” by proponents, to replace the state’s current flat rate income tax.

To learn more about how the Fair Tax not only ties income tax burden to ability to pay, but also raises new revenue in a manner that will effectively help eliminate some of the long-term structural flaws that have consistently made Illinois’ overall tax system one of the most unfair and poorly performing in the nation, please read the new CTBA Report, “Implementing the “Fair Tax” Will Help the Illinois Fiscal System Respond Better to the Modern Economy While Promoting Tax Fairness.”

Since 1979, the nation has seen a rapid and significant increase in income inequality between low- and middle-income Americans on the one hand, and the wealthiest one percent on the other. Over that time span, the bottom 99 percent of American households saw their incomes increase by an average of just 14 percent after inflation. Meanwhile, the wealthiest one percent saw their inflation-adjusted incomes balloon by 175 percent on average—or fully 12.5 times more than the income growth realized by everyone else.

Illinois not only followed this trend, but when compared to the other 49 states, experienced one of the greatest increases in income inequality over this sequence. In fact, between 1979 and 2015, the top one percent of households in Illinois realized a 177 percent jump in inflation-adjusted income on average – which is almost 20 times greater than the nine percent average income growth experienced by the bottom 99 percent of Illinois households. And that’s before the impact of Illinois’ regressive tax system is taken into account.

Because Illinois’ tax system is “regressive,” meaning lower- and middle-income people pay a larger proportion of their earnings in state and local taxes than do higher-income people, income inequality in the state is even greater on a net, after-tax basis. 

If properly designed, however, income tax policy can help lessen after-tax income inequality. In fact, the income tax is the only tax which can be broadly used to lessen net, after-tax income inequality, because it is the only tax that can be designed to correspond to ability to pay. This is best accomplished through the implementation of a graduated rate structure that imposes lower tax rates on lower levels of income and higher rates on higher levels of income – which is precisely what Governor Pritzker has proposed doing in Illinois. And in a state like Illinois, which has to increase tax revenue to address the multi-billion dollar long-term structural deficit in its General Fund, creating a graduated rate income tax is one of the few ways the state can generate new revenue without worsening income inequality.