The Illinois Senate passed a series of measures last Wednesday that would send Democratic Gov. JB Pritzker’s graduated income tax proposal to the voters in 2020.
The Senate passed three bills and one joint resolution constitutional amendment to create the new income tax structure, which would tax varying levels of income at different rates.
Currently, Illinois has a constitutionally-mandated flat tax structure, meaning all income is taxed at 4.95 percent. Illinois is one of eight states that uses that system.
Only Democrats voted for any of the measures, which are now in the House.
Pritzker praised the Senate’s actions.
“I applaud the Senate taking a major step forward to create a fair income tax system in Illinois, ensuring that 97 percent of taxpayers will pay the same or less and only those making $250,000 will pay more,” Pritzker said. “I look forward to continuing our conversations with stakeholders in the House as we take action on the fair tax.”
Pritzker further said the legislation would “stabilize our state’s finances and protect the middle class and those striving to get there.”
The measure that would go to voters is Senate Joint Resolution Constitutional Amendment 1, which “provides that the income tax may be a fair tax where lower rates apply to lower income levels and higher rates apply to higher income levels.”
The three bills deal with particulars of the plan, with Senate Bill 687 having much of the substance of the proposal.
That bill requires that those who file a tax return as single pay 4.75 percent on taxable income up to the first $10,000; 4.9 percent on income between $10,001 and $100,000; 4.95 percent on income between $100,001 and $250,000; 7.75 percent on income between $250,001 and $350,000; 7.85 percent on income between $350,001 and $750,000; and 7.99 percent on all income if a single filer makes over $750,000.
For joint filers, the same rates apply but they cover different ranges.
The 7.75 percent rate is on income between $250,001 and $500,000; the 7.85 percent rate applies to income between $500,000 and $1 million; and joint filers making over $1 million pay 7.99 percent on all income.
Those rates are slightly higher than Pritzker’s original ones, which topped out at 7.85 percent.
Those opposed to the change say the rates going up like that represents one of their main concerns.
“Today’s Senate action continues to ignore the reality that Illinois politicians have an insatiable desire to spend more money and expand the size of government,” Sen. Paul Schimpf (R-Waterloo) said. “Changing our taxing structure, without providing a means to limit spending or make it more difficult to raise taxes in the future solves nothing. In fact, this plan will most likely only lead to more tax increases and higher spending in the future.”
Senate Bill 687 also includes an increase in the property tax credit from 5 percent to 6 percent and a $100 per child tax credit for couples earning less than $100,000 and single people earning less than $80,000.
The property tax credit only applies if the taxpayer makes less than a certain amount and the property is the taxpayer’s principal residence.
Finally, the bill slightly increases the state’s investment in local governments and raises the corporate tax rate from 7 percent to 7.99 percent.
The other two bills, Senate Bill 689 and 690, eliminate Illinois’ estate tax and provide a property tax freeze on school districts, respectively.
The estate tax, which taxes the transfer of property after death, currently only applies to estates exceeding $4 million.
The tax freeze only applies to districts that did not receive a portion of their state funding for state-mandated items.
All the bills are tied to the passage of the joint resolution.
The passage of the graduated income tax has been a centerpiece of Pritzker’s plan to improve the state’s finances, as he has projected it would bring in more than $3 billion in additional revenue.
He has also said it would be fairer for the majority of taxpayers.
“The fair tax would stabilize our state’s finances, eliminate the budget deficit, help balance future budgets and reduce the net pension liability,” Pritzker said, using a label for the graduated income tax.
Republicans, who are united against the idea, argue the current flat tax structure protects the middle class.
“I believe the crafters of our current Constitution, which included a flat tax and was embraced by the people of Illinois, designed it specifically to protect middle-income families from politicians,” Senate Minority Leader Bill Brady (R-Bloomington) said.
The flat tax system has been in place since 1969 and was made part of the Constitution in 1970 .
Republicans say changing the tax system could hurt the economy in several ways, especially given the lower tax brackets in neighboring states.
According to the nonpartisan Institute for Illinois’ Fiscal Sustainability at The Civic Federation, the proposed changes to the rate would put Illinois on the high end among nearby states.
The low rate of 4.75 percent would rank second highest behind only Minnesota’s bottom rate of 5.35 percent.
The highest rate of 7.99 would be third behind Iowa’s top rate of 8.53 percent and Minnesota’s 9.85 percent.
Moreover, according to the right-leaning Illinois Policy Institute, economic growth in states with a graduated income tax is 2.4 percent slower than the national average, compared to 5.9 percent faster than the average in other states.
On the other hand, a 2019 study by the left-leaning Illinois Economic Policy Institute and University of Illinois Project for Middle Class Renewal found a graduated income tax “could grow the economy by increasing investments and boosting consumer demand.”
The measure now heads to the House, where it needs 71 votes to pass.
There are 72 Democrats in that chamber. Two other spots, including the one formerly occupied by Jerry Costello II, will also belong to Democrats.
If it passes the house, the proposal would go to Illinois voters in the 2020 election.
Three-fifths of those voting on the amendment or a majority of those voting in the election would need to OK the measure for it to pass.