Increasing the Income Tax Rate
Increasing the Income Tax Rate: One Method for Addressing Illinois’ Long-term Fiscal Problems
February 16, 2021
This past November, voters failed to ratify an amendment to the Illinois Constitution that would have permitted replacing the state’s flat rate income tax with a graduated structure. That in turn killed the “Fair Tax” legislation, which was designed to raise around $3.6 billion in new, annual revenue (during a normal economy), by imposing higher income tax rates on the wealthiest three percent in Illinois, while reducing the income taxes paid by the bottom 97 percent of the state’s earners. This failure was unfortunate because the Fair Tax would have helped address key structural flaws in the state’s tax policy that both drive its long-term General Fund deficits, and make Illinois one of the most regressive, and hence unfair, taxing states in the nation.
As things stand today, the state’s General Fund deficit is large and growing. Illinois is suffering from a long-term structural deficit in its General Fund that cannot be eliminated without re-amortizing the Pension Ramp as detailed previously, and either raising taxes, or significantly reducing spending on core services like education, public safety, and human services. The better public policy solution is to raise taxes, given that: (i) Illinois is already low spending on services when compared to the rest of the nation; (ii) Illinois has been cutting its real investment in core services for decades; (iii) underfunding core services is harming communities across the state; and (iv) flawed tax policy which resulted in poor revenue generation is the primary driver of the structural deficit in the General Fund to begin with.
There are two primary revenue sources that most states rely on to fund current services, the income tax and the sales tax. Illinois is no exception, with roughly 54 percent of its General Fund revenue in FY 2020—the last complete fiscal year before COVID-19—coming from state level income taxes (individual and corporate, collectively) and another 22 percent coming from sales taxes.
If the goal is to raise revenue to help address the structural deficit, while also making tax burden incidence fairer, the amount of any such income tax increase that low- and moderate-income families would have to pay should be offset with targeted tax relief. Please read more about CTBA’s solution to increasing the income tax in Illinois in tandem with the utilization of refundable income tax credits in the short report “Increasing the Income Tax Rate: One Method for Addressing Illinois’ Long-term Fiscal Problems”.