Taxing work

Might a graduated income tax fix Illinois’ broken revenue system?

DYSPEPSIANA | James Krohe Jr.

In 2011, the General Assembly, kicking and screaming, did what was good for it and ate its spinach. Members raised the rate at which the State of Illinois taxes the income of its citizens, thus forestalling a revenue crisis. That tasted so bad that they could not swallow it; the rate will have to be reauthorized in 2015, and the legislature might simply spit it back out.

How best to raise the money the state needs to run its operations has vexed lawmakers since the founding of the commonwealth. A few years of a temporary income tax hike won’t be enough to solve the state’s fiscal ills because the state has been chronically underfunded for a generation. Its pension mess, for example, owes to the fact that Illinois for decades underpaid its workers in present wages, paying them instead in future pensions.

The state still spends much more than it takes in, but not because of runaway spending. State spending is up since 2000, of course, because there are more people in Illinois and the things that government buys – concrete, paper clips – cost more than they did then. Adjusted for inflation and population growth, General Fund spending on services in FY2013 will be more than a quarter less than in FY2000.

In the opinion of a lot of people, raising the income tax improved the state’s bank balance at the cost of making a bad revenue system worse. Illinois imposes a flat levy on all eligible incomes – for the moment, 5 percent on individuals. The multimillionaire hands over the same proportion of his income in tax as his kid’s nanny, although he hands over more actual money because he has a higher income.

Same rate for all – that certainly seems fair. Illinois also relies on a sales tax, which also is a flat levy. And while the well-to-do enjoy exemptions, deductions and credits that reduce how much of their money is subject to income tax, the poor, the working class and most of the middle class do not. Because virtually every dollar earned by the latter is used to buy stuff, most of them are subject to sales tax. Renters also pay their landlords’ local property taxes but get no income tax deduction for doing so. Data compiled by the anti-poverty Corporation for Enterprise Development shows that the poorest 20 percent of families in Illinois pay 2.8 times more of their income in taxes than the top 1 percent do.

The rich pay most of the taxes but the poor pay more of their income in taxes – that certainly seems unfair.

Senate President Pro Tem Don Harmon of Oak Park has introduced a constitutional amendment that would do away with the flat-rate income tax requirement. Under a graduated tax like the feds use, rates would rise with incomes. There are a million ways to construct such a tax. One proposed in 2012 by the Center for Tax and Budget Accountability would cut the overall state income tax burden for 94 percent of all Illinois taxpayers, which includes everyone with less than $150,000 in base income. At the same time, the center says its plan would raise at least $2.4 billion in new revenue annually.

The good thing about a graduated tax is that it raises more money for state government. The bad thing about a graduated tax is that it raises more money for state government. Senate Republican Leader Christine Radogno damned it the other for just that reason – if you give the state more money, it will just spend it. That’s good if the money needs to be spent, say, to repay social service agencies that have been stiffed for years, or to put pensions on a sound footing or to fix the roads. That’s bad if, like some of Radogno’s caucus, you regard any tax as essentially confiscatory.

Ideally, lawmakers eager to fix the state’s revenue system will design a tax system which produces adequate revenue at the least pain to people and with the least discouraging effect on enterprise. On those grounds a well-designed graduated tax on income is usually to be preferred, if only because no society has proved stable for very long if it is grossly unequal in opportunity of the sort that government either provides or guarantees.

No lawmaker makes decisions based on how the taxes add up but on how the votes add up. Illinois’ flat rate was a political fudge by the convention of worthies who rewrote the state’s constitution in 1970. The fudge was that the progressive-taxers agreed to accept a flat non-progressive tax in exchange for nontaxers’ agreeing to give the state the power to tax income at all.

Opinion since then has hardened, or maybe we should say curdled. The challenge today is designing a system of taxation when people don’t believe in government or, worse, who believe in government (as long as it does things for them) but don’t believe in taxes.

Contact James Krohe Jr. at krojr@comcast.net.