A few months ago, we described the financial situation in Illinois as one that is highly problematic. In his Jan. 27 state of the state speech, Gov. Rauner conceded that there are fewer jobs now than 15 years ago, the average working family is making less than they were eight years ago, the state is tied for the highest property taxes in America, and there are too many layers of government and mountains of debt at every level.
Illinois has been struggling for years. The Tax Foundation explains that in 2011, lawmakers temporarily increased the individual income tax from 3 to 5 percent to help pay for the growing debt and unpaid bills. In 2015, the rate fell back to 3.75 percent, and in 2025, is scheduled to drop again, to 3.25 percent. Although the 2011 tax increase raised $30 billion, the state still has more than $7.2 billion in unpaid bills, and Gov. Rauner remains at a standoff with lawmakers, and unable to pass a fiscal year 2016 budget.
Some think a graduated tax would help raise much needed revenue. House Deputy Majority Leader Lou Lang has proposed legislation, HB 689, that would impose such a structure. This would be contingent on a change to the Prairie State’s constitution, which is contained in a proposal that would remove the requirement that the individual income tax be at a flat, non-graduated rate. In a press release, Rep. Lang justified his plan on the grounds that it would “provid[e] a tax cut to 99% of Illinois taxpayers while raising an additional $1.9 billion dollars to help fund essential state services.”
The Tax Foundation criticized Rep. Lang’s program, which would convert the single-rate individual income tax into a four-bracket tax with a top rate of 9.75 percent on individuals, and 11.25 percent on small businesses. Not only would a graduated tax give Illinois the second highest rate in the country on pass-through businesses, after California, it would change “one of the most competitive elements of the Illinois tax code,” causing a drop, from 23rd to 48th, on its State Business Tax Climate Index.
What is more, the research group found that although most individuals would not face higher tax rates under HB 689, some businesses currently subject to a pass through rate of 5.25 percent would. Those that fall into that category account for nearly 72 percent of all pass-through income. The companies responsible for over half of all small business income would be subject to a top marginal rate of 11.25 percent.
On the other hand, an Institute on Taxation and Economic Policy analysis characterized the news as a “positive headline.” It concluded that the more progressive tax, requiring “less from those with less and more from those with more,” would generate desperately needed revenue that would help Illinois regain its financial footing in the short-term, and keep up with the rising costs of services for the long-term.