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Graduated tax politics as usual

The pitch for a graduated income tax sounds a lot like Illinois politics as usual. 

Supporters of the plan, which aims to drastically increase income taxes for high earners, say it will be key to solving the state's budget problems. They say the remaining 97% of us will actually see a meager tax cut, no doubt meant to entice 60% of Illinois voters to support amending the state constitution to allow the change when the question appears on the November 2020 ballot. 

The idea that a tax increase will solve the state's problems isn't new. That's what lawmakers said when they increased the income tax from 3% to 5% in 2011, and again when they essentially restored that increase in 2017. Nothing was solved. Yet lawmakers the Democrats in control in Springfield persist in the belief that the answer to Illinois' problems is just one tax hike away. 

On Monday, the Illinois House voted, 73-44, in favor of placing the graduated tax issue on the ballot; the Senate voted 40-19 earlier this month in favor. The measure had no Republican support in either chamber, but still received the necessary two-thirds majority.

The proposed rate structure is complicated, but essentially calls for income taxes to remain at or near the current 4.95% rate for income up to $250,000. Income above that would be taxed significantly more, with earnings above $250,000 taxed at a rate of 7.75%, with stepped-up increases as income levels climb. The property tax credit would increase from 5% to 6%, and a $100-a-child tax credit for married couples earning less than $100,000 and single people earning less than $80,000 would be added. Those who earn more than $1 million a year would pay a flat 7.99% rate on all their income. 

The concern isn't just what taxpayers will be asked to pay now, though – it's what they'll pay later.

Pritzker expects his "fair tax" plan will generate about $3.4 billion in revenue for state government. He's counting on it. 

If the revenue generated fails to meet expectations, or if legislators decide they just need just more money to spend, it will be much easier to increase taxes. 

There's significant political risk to increasing a flat tax on everyone, which is why it typically has required the votes of lame-duck lawmakers, sometimes on holiday weekends, to get it done. 

A graduated system will allow them to target "brackets" of people. They're starting by targeting 3% of the population deemed "high earners," but little by little, those rates will creep down to people who earn $200,000, $150,000 or less a year. 

Illinois small businesses, meanwhile, are looking at a double-whammy. Not only will their income tax likely increase (corporate rates will go as high as 10.45%), the minimum wage also is set to gradually climb until it plateaus at $15 an hour by 2025. Small businesses create the vast majority of jobs in Illinois, and actions of state government could lead many to close or relocate to other states.

So far, lawmakers have done the easy part – placing a tax change on the ballot and pitching it as targeted at the wealthy. They've skipped the hard steps, like assistance for the small business community, relieving the property tax burden on homeowners, cutting spending, or addressing the largest cause of Illinois' financial woes – the more than $130 billion in unfunded pension obligations. 

It's possible that some kind of graduated tax system could work in Illinois. But until there's evidence of a commitment to financial discipline – and true reform – from lawmakers, it's ill-advised to support a change that opens the floodgates for future tax hikes. 

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