Illinois desperately needs a graduated income tax. According to the Center for Tax and Budget Accountability (CTBA), a graduated income tax would cut the overall state income tax for 94 percent of all taxpayers, i.e. those with annual incomes under $150,000.
In addition, it would raise at least $2.4 billion annually in new revenue by shifting the tax burden to affluent taxpayers. The additional $2.4 billion would help eliminate the ongoing structural deficit in the state’s General Fund. Structural deficits prevent the state from making investments in infrastructure, transit, education, etc. that are essential for Illinois to remain competitive in a global economy. The additional revenue would also stimulate the growth of at least 36,000 jobs in the state’s private sector through enhanced public and consumer spending.
Despite this shift, a millionaire’s effective tax rate (what he would actually pay) would be just 4.3 percent of income (currently Illinois millionaires pay an effective state income tax rate of 2.1 percent, according to CTBA). According to Joseph Stiglitz, Nobel Prize-winning economist, modestly increasing taxes on affluent folks does not materially reduce their spending — the reason being that affluent families enjoy such a significant portion of all income growth that they have a very low marginal propensity to consume (whereas low- and middle-income families have a very high marginal propensity to consume because they do not earn enough income to save).
There is also evidence that imposing high marginal state income tax rates on the wealthy does not impede state economic growth over the long term. The Institute on Taxation and Economic Policy (ITEP) compared nine states with the highest marginal individual income tax rates with nine states with no individual income tax in three core economic indicators, i.e. per capita real gross state product growth, real median income growth, and average annual unemployment rate. The high individual income states were California, Hawaii, Maine, Maryland, New Jersey, New York, Ohio, Oregon and Vermont. The states without a broad-based individual income tax were Alaska, Florida, Nevada, New Hampshire, South Carolina, Tennessee, Texas, Washington, and Wyoming. Between 2001 and 2010 the high individual income tax states realized greater growth in real per capita gross state product than their non-tax peers (10.1 percent to 8.7 percent); significantly lower loss in real median household income (a decline of 0.7 percent to 3.5 percent ); and an identical average annual unemployment rate of 5.7 percent .
Illinois’ current tax policy is neither fair to taxpayers nor designed to sustain service levels. It also reduces consumer spending by low- and middle-income families which hurts Illinois’ economy.
With a graduated tax structure, Illinois can:
1) create a fairer tax system,
2) raise revenue to pay the state’s bills,
3) stimulate the economy, and
4) fund vital public services.
In 2015, the temporary income tax increase will begin being phased out. However, Illinois will still need to fund necessary public services as well as pay current and past bills. Now is the time to act.
Al Popowits is a resident of River Forest.