Pritzker’s Graduated Tax Fails On All Counts

The only major, contested issue on the ballot this fall in our Blue State will be whether to enact Gov. Pritzker’s proposed constitutional amendment to allow graduated income tax rates. I think the Pritzker approach—not the concept—is wrong-headed. I try to explain here.

Background. Throughout this century, Illinois has each year been spending and obligating billions more than we have been generating in revenues. So now, each of Illinois’ 4.6 million households would have to cough up $41,000 to get our state out of its deficit position of $188 billion, according to figures from the Illinois comptroller.

Painful to say, Illinois will have to raise taxes, or someday default on our obligations. Why can’t we simply cut spending, you ask? In practical terms, we aren’t allowed to cut the big-ticket items.

The primary, gargantuan culprits are Medicaid and our public pensions. In partnership with the federal government, Illinois covers the health insurance of more than 3 million residents. Illinois forks out a much higher percentage of the shared cost than do most states, and costs have been rising faster than inflation for decades.

Public pensions now eat up more than one-quarter of the state’s General Fund budget, for a pension system that has assets of less than 40 percent of what is needed for the future. Neighboring Wisconsin spends just a small slice of its state budget for a pension system that is 100 percent funded.

The Illinois Supreme Court has said lawmakers cannot touch the pensions, many of which have grown way too fat—110,000 public retirees in Illinois each receive from $100,000 to half a million dollars a year in pension payments!

(For more than you ever wanted to know about Illinois’ budget woes, go to jimnowlan.com.)

To address the budget problems, Pritzker and legislators passed legislation last year to increase taxes on a tiny sliver of very high-income earners. First, the constitutional amendment must be enacted in November.

These tax prescriptions fail, in my mind, because they are unlimited; not really graduated; uneven and unfair; inadequate, and would drive yet more successful people out of the state.

Unlimited. There is no limit on how much more the rich can be taxed than the rest of us. The present state constitution limits corporate income taxes to a ratio of no more than 8 to 5 over individual rates. That provides some protection for the few, from the many who would rather tax someone else, as in the new 2020 tax increases.

Not really graduated. The Pritzker plan is simply “sock it to the rich,” by putting a surcharge on the top-end earners. Other rates are left basically flat.

Uneven and unfair. The state retiree getting half-a-mil in yearly pension checks will pay absolutely no state taxes on that income. Nor will any person receiving big pensions, as retirement income isn’t taxed at all. Progressive? Fair?

Inadequate. The tax on the highest-end earners will generate about $3 billion annually. But the state needs about $5-6 billion to straighten out its mess (even before the coronavirus). So, next year, Pritzker will have to increase taxes further, something he implied he wouldn’t need to do. Or, kick the can down the road with pension appropriation holidays, pushing Illinois debt to junk status.

Would drive people out of our state, often to Florida and Texas, which have no income tax whatever. According to a Wirepoints analysis of IRS tax migration data, nearly one-third of the net outflow of 43,000 filers from our state in 2018 had incomes of over $100,000 and represented almost 80 percent of the $5.6 billion in net income that departed the state that year.

What to do about a fiscal system that has been all screwed up, at least since I voted for the original income tax, as a young member of the Illinois House in 1969?

First, defeat the constitutional amendment, and in two years maybe put a graduated tax proposal on the ballot that has limits, say 2 to 1, or whatever.

Defeat will force a special session of the legislature. Under pressure of looming state default, lawmakers could finally do what public finance experts have recommended for years: Broaden the bases of the sales and income taxes. Tax services, as in Iowa and many states, and retirement income, as in most states. This could generate more revenue than simply socking it to the rich, who can never alone straighten out Illinois’ fiscal shambles.

Second, take a stab at reversing fat pension growth, by rejecting state supreme court justice Thomas Kilbride, who seeks to extend his tenure to 30 years. Sound unrelated? Not so.

Kilbride is at the bottom of an inverted pyramid of political power in Illinois. The state high court has been controlled by Chicago Democrats continuously since 1964. Elected on a partisan basis, the court majority has reliably blocked policies their party patrons don’t like—term limits, redistricting reform, pension cost cuts.

Kilbride is a handmaiden of Chicago Democratic boss Mike Madigan, who bankrolled his campaigns for the bench. For example, Kilbride authored the notorious, embarrassing 2016 decision (4-3 Democrat over Republican justices) that knocked off the ballot a citizen initiative to reform redistricting, bitterly opposed by Madigan.

With Kilbride off the court, there would likely be a 3-3 partisan split. Such a balanced court would view gerrymandering and pension reform much differently than did the old court.