Illinois Passes Constitutional Amendment to Allow a Progressive Income Tax

Voters will decide next year whether to impose it.

Voters in Illinois will have a chance to raise taxes next year. Indeed, they'll be able to fundamentally alter the state's tax code.

Before Monday, the state constitution prevented the government from taxing different levels of income at different rates. But on Monday, the Illinois House of Representatives amended the document to allow a progressive income tax. Voters will choose whether to implement such a tax in 2020.

This tax increase would come on the heels of major state tax hikes in 2017, when the legislature raised income taxes from 3.75 percent to 4.95 percent and corporate income taxes from 5.25 percent to 7 percent.

The proposal on the ballot would replace the existing single 4.95 percent rate with a six-bracket progressive income tax. Gov. J.B. Pritzker's plan would raise taxes on income over $250,000 to 7.75 percent, income over $500,000 to 7.85 percent, and income over $1 million to 7.95 percent. People at the bottom of the income scale would receive a small tax cut: The first $10,000 in income someone earns would be taxed at a 4.75 percent rate instead 4.95, and income between $10,000 and $100,000 would be taxed at a 4.9 percent rate.

The simple, flat personal income tax of 4.95 percent has remained a rare bright spot of Illinois' tax code. The Tax Foundation, a nonpartisan tax policy think tank, has ranked the state's personal income tax the 13th most competitive in the country; Illinois's tax code generally is ranked 36th.

The tax's supporters argue that it will address Illinois' budget shortfall of $3.4 billion in fiscal year 2021, stabilizing a jurisdiction that the libertarian-leaning Mercatus Center has ranked the least fiscally healthy state in the nation. But the Illinois Policy Institute, a free market think tank, argues that the Pritzker administration has overestimated the revenue the tax would raise. Even if the higher tax rates do not slow down economic growth, IRS data indicate that the tax would raise roughly $2.4 billion, not the $3.4 billion promised. 

Another defense of the law points out that it will not raise taxes for the 97 percent of taxpayers that make less than $250,000. Yet given the size of Illinois' long-term fiscal problems, a progressive tax system could mean future tax increases on the middle class once the rich have been soaked.

Another concern is that high-income earners will respond by leaving the state, a phenomenon known as tax flight. Advocates of tax increases have proclaimed that tax flight is a myth, citing a study by the Stanford sociologist Cristobal Young that found a 10 percent increase in the tax rate would produce an exodus of 1 percent of millionaires. Young's work doesn't debunk the concept of tax flight so much as suggest it's a fairly marginal phenomenon with few implications for public policy.

But more recent research suggests otherwise. A National Bureau of Economic Research study published in April found that high-income individuals' migratory responses to high taxes can be quite high, depending on the proximity of lower-tax jurisdictions, individuals' roles in the labor market, and the level of human capital. Given Illinois' location, that means tax flight could be a real concern. Many of the states surrounding Illinois have enacted significant tax reforms recently. Missouri lowered its corporate and top individual taxes last year, as did Kentucky and Iowa, while Indiana's tax code is already among the most competitive in the country.

And it would be a mistake to focus on millionaire out-migration alone. The personal income tax isn't just paid by rich individuals—it's also a tax on businesses whose profits are passed through to their owners' individual tax returns. Pass-through businesses employ over 57 percent of private sector workers in Illinois. The state already suffers from slow private-sector job growth, and layering on an additional major tax won't help.  

The elephant in the room is Illinois' fiscal crisis. This is mainly driven by pensions, which take up over a quarter of state government spending and are projected to rise to more than half of state revenue over the next 30 years. As Illinois Policy Institute budget and tax research director Adam Schuster says, "the only path towards prosperity in this state is to reform the state's largest cost drivers, not dive further into taxpayers' wallets." While a tax increase might plug the fiscal hole for a few years, pension costs will continue to grow.