Illinois taxes hit most vulnerable the hardest

Bill Knight column for Thurs., Fri., or Sat., March 5, 6 or 7

Amid alarm about Gov. Bruce Rauner’s proposed spending cuts affecting most Illinoisans, the idea of raising more revenues through tax reform has been almost lost. But a new study could help revive the notion that Illinois’ tax system is not only unfair but also hurts the state’s economic prospects.

Illinois has the fifth most regressive tax system in the country, according to the Institute on Taxation and Economic Policy (ITEP). That means low-income and middle-class people are hit the hardest.

“The problem with our state tax systems is that we are asking far more of those who can afford the least,” said Meg Wiehe, a state director for ITEP, which published “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”

Illinois’ flat income tax, now 3.75 percent, costs the state money, as does the income inequality since such disparity curtails consumer spending, which reduces public revenues. In fact, a correlation between income inequality and slow growth is most noticeable where there are regressive taxes – like Illinois.

“Between rich and poor … Illinois is among the states with the most pronounced divide,” wrote journalist Marcia Frellick for Illinois Issues. “The richest 5 percent of households in Illinois have average incomes nearly 15 times as large as the bottom 20 percent of households; nearly five times that of the middle 20 percent.”

Illinois’ tax system makes things worse.

“Regressive state and local tax policies don’t just harm the poor — they end up harming entire economies,” said International Business Times senior writer David Sirota. “So if altruism doesn’t prompt you to care about unfair tax rates and economic inequality, then it seems self-interest should.”

Again, because of the way income is taxed in Illinois, working people and the middle class pay higher tax rates than the wealthy, ITEP shows. Considering state and local income, sales and property taxes together, the poorest 20 percent of Illinoisans pay 13.2 percent of their income; the middle 60 percent pay 10.9 percent; the top 1 percent pays just 4.6 percent.

Meanwhile, local governments – where Rauner wants to reduce state aid – already rely heavily on sales and property taxes, according to the General Assembly’s bipartisan Commission on Government Forecasting and Accountability. In 2009 it issued a report saying, “Historically, local governments in Illinois have been more dependent on local property taxes than are local governments in other states. Illinois property taxes generated 36.3 percent of local government revenue, which exceeded the national average of 27.9 percent.”

Property taxes, whether paid by property owners or indirectly by tenants, are inefficient, too.

“Illinois’ property tax as a share of income is one of the highest in the country,” reported journalist Whet Moser in Chicago magazine. “Connecticut’s is higher on the very poor and the middle class; New York’s is higher on the very poor; Vermont is higher on the lower-middle and very-middle classes; and New Jersey’s are higher across the board. But all those states have progressive income taxes.”

Since Illinois’ flat income tax is in the state constitution, reform won’t be easy. Former State Rep. Naomi Jakobsson (D-Champaign) and 39 co-sponsors, including State Rep. Jehan Gordon-Booth (D-Peoria), in the last two years pressed for a constitutional change allowing a progressive, graduated tax where people who make more money pay a higher tax rate. But since three-fifths of the members of both chambers of the legislature are needed for the measure to be on a ballot, it failed.

“A survey from the Paul Simon Public Policy Institute found a majority of people support a progressive income tax to raise sorely needed state revenue,” Jakobsson said in 2013. “A recent legislative analysis found that if households earning more than $250,000 a year were taxed at a national standard of 6 percent [rather than the current flat rate of 3.75 percent], the state would collect an additional $3 billion a year.”

The plan would have meant lower income tax bills for 83 percent of Illinoisans, she said.

“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” said Matt Gardner, executive director of ITEP. “Upside-down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem. State policymakers shouldn’t wring their hands or ignore the problem. They should thoroughly explore and enact tax reform policies that will make their tax systems fairer.”

[PICTURED: Photo from itsoureconomy.us.]