Flat Tax In Illinois: Constitutional Or Not?

Illinois has had a flat income tax since 1969, with all taxpayers paying the same rate, currently 4.95%. This flat tax is required by the state's constitution, which treats all taxpayers the same. However, there have been several attempts to amend the constitution to allow for a graduated income tax, which would impose higher tax rates on higher income levels. The most recent attempt was the Illinois Allow for Graduated Income Tax Amendment, which was on the ballot in the November 2020 election but did not receive enough votes to pass.

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Graduated income tax

The Illinois Constitution of 1870 contained a revenue article that authorized taxes on four categories: property, privileges, franchises, and certain occupations. It also required that taxes on each category be uniform. A new constitution, designed to replace the 1870 governing document, was presented to voters in 1922. The proposed revision included a provision for an income tax, specifying that the income tax rate could be graduated, but the highest rate could never exceed three times the lowest rate. However, the revised constitution was rejected by voters due to objections to the revenue proposal from both ends of the political spectrum.

In 1969, Illinois adopted a flat income tax, which has been the state's policy ever since. A flat tax treats all taxpayers equally, regardless of their income level, and currently stands at 4.95% in Illinois. However, this flat tax system has been a topic of debate, with some advocating for a shift to a graduated income tax structure.

A graduated income tax, also known as a progressive income tax, is a system where the tax rate increases as the taxable income increases. In other words, those with higher incomes pay a larger percentage of their income in taxes. This approach is based on the principle of "ability to pay," which suggests that those with greater financial means should contribute more towards essential government services like education, healthcare, and social welfare programs.

Proponents of the graduated income tax argue that it promotes social justice, fosters a more equitable distribution of resources, and enhances economic stability by reducing income inequality. Additionally, they contend that this system is a fair way to finance public goods and contributes to a more inclusive society. According to the U.S. Department of Treasury, the graduated income tax in the U.S. generated 51% of total federal revenue as of February in fiscal year 2024.

On the other hand, critics of the graduated income tax argue that it may reduce the incentive for entrepreneurship and risk-taking, which are key drivers of economic growth. They also point out the complexity of the U.S. tax code, which can make it challenging for taxpayers to understand their obligations and potentially lead to errors in tax calculation or filing. Additionally, there are concerns about the potential for higher tax evasion or avoidance rates as high-income earners may seek ways to minimize their tax burden.

Illinois Fair Tax

The Illinois Fair Tax, also known as the "Fair Tax for Illinois", refers to a proposed constitutional amendment that would introduce a graduated income tax in the state. Under the current Illinois state constitution, a flat income tax is required, meaning that all income levels are taxed at the same rate. This rate is currently 4.95%.

The amendment, proposed by Governor J.B. Pritzker, would remove the portion of the Revenue Article of the Illinois Constitution that requires income to be taxed at a flat rate. Instead, it would allow the state to impose higher tax rates on higher income levels and lower tax rates on those with lower incomes. Pritzker and other proponents of the amendment argue that this would create a fairer tax system, as it would reduce the tax burden on lower-income taxpayers. They also argue that it would generate much-needed revenue for the state, which is facing a budget crisis.

However, the proposal has faced opposition from some Illinois residents, particularly the state's wealthiest residents, who stood to be most affected by the change. Opponents argue that the amendment would cause residents and businesses to leave the state and that it would do nothing to address Illinois' existing financial issues.

In November 2020, Illinois voters rejected the amendment, with 47% voting in favour and 53% against. As a constitutional amendment, the proposal needed to be approved by 60% of those voting on the referendum or by 50% of all voters in the election. Despite the rejection, the debate around the Illinois Fair Tax highlights the ongoing discussions about tax fairness and revenue generation in the state.

Flat tax benefits

Illinois has had a flat income tax since 1969. The current rate is 4.95%, though it has varied over the years. However, in 2020, a resolution was passed to amend the Illinois Constitution to allow the state to move from a flat tax rate to a graduated rate. This amendment would remove the portion of the Revenue Article that requires all income taxes to be at the same rate.

Flat tax is a system that applies a single tax rate to all levels of income. It is the opposite of a progressive tax system, in which the rate of taxation rises with a taxpayer's income. Here are some of the benefits of a flat tax system:

Simplicity

Flat tax systems are much simpler than progressive tax systems, making it possible for all individuals to fill out their tax forms without professional help. This also eliminates compliance costs and reduces red tape.

Economic stimulus

Supporters of the flat tax claim that it would motivate people to work more, earn more, save more, and invest more, resulting in economic growth that benefits everyone. Flat tax proposals have also included the elimination of all taxes on dividends, interest, and other unearned income as an additional economic stimulus.

Ethical governance

A flat tax system would make it impossible to manipulate the tax code to benefit any particular group, thereby reducing the influence of lobbyists over legislators and other government officials.

Transparency and fairness

Proponents of flat tax argue that it is fairer and more transparent than a progressive tax system. They claim that a flat tax makes it clear that everyone is paying the same rate, regardless of income level.

Increased savings

Flat tax could boost savings by raising the after-tax return on saving and by shifting income toward high-saving households. It would also eliminate the issue of double taxation on some forms of personal savings.

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Flat tax criticisms

Illinois is one of 11 US states with a flat income tax, which taxes all income levels at the same rate. This flat tax is required by the current Illinois state constitution. However, there has been a push to move away from this flat tax system.

Flat tax systems have been criticised for their inability to facilitate wealth redistribution. This is because flat tax rates do not account for income disparities, and can therefore impose a burden on middle and lower-income families. For example, if an individual earning $1 million per year pays 18% in taxes, they would still net $820,000, which is a substantial amount of money. However, if another individual earned $50,000 per year and paid the same 18% tax rate, they would only net $41,000, which could be a financial strain.

Flat tax systems have also been criticised for their potential to trigger tax rate wars with neighbouring countries. This could lead to fiscal instability. Additionally, critics argue that there is no proof that the flat tax is the reason for the economic growth seen in some countries that have adopted it. Many of these countries were once communist nations, and their economic growth may be attributed to their ability to open up their economies to investment and trade with the West after the collapse of the Soviet Union.

Another criticism of the flat tax is that it does not incentivise taxpayers to earn more, as they are not rewarded with lower tax rates and brackets based on their income level. Instead, they are penalised for earning more by being pushed into higher tax brackets.

Furthermore, flat tax systems do not allow for deductions or exemptions, which can simplify taxes but may result in many low-income households having to file tax returns.

Constitutional amendment

The flat tax is currently enshrined in the Illinois Constitution, which treats all taxpayers the same under a flat tax rate of 4.95%. This flat tax rate has been a part of Illinois' income tax laws since 1969, when it was established at 4%. However, there have been several attempts to amend the Illinois Constitution to remove the flat tax and allow for a graduated or progressive income tax structure.

In 2013, State Rep. Naomi Jakobsson proposed HJRCA 33, which was rejected by the House Revenue Committee in March 2014. In the same year, Sen. Don Harmon proposed a Fair Tax amendment (SJRCA 40) that passed the Senate Executive Subcommittee on Constitutional matters. This amendment sought to remove the portion of the Revenue Article of the Illinois Constitution that requires all income taxes to be at the same rate.

During the 2018 Illinois gubernatorial election, Democratic candidate J.B. Pritzker campaigned in support of a Fair Tax amendment, which would have allowed the state to impose higher income tax rates on higher income levels. Pritzker won the election, and on January 28, 2019, Senator Harmon introduced a joint resolution proposing a constitutional amendment to change from a flat tax rate to a graduated rate. The resolution was approved by the Senate and the House, and the proposed amendment was placed on the ballot in the November 2020 general election.

However, the ballot measure for the Illinois Allow for Graduated Income Tax Amendment was defeated, receiving only 47% "yes" votes. As a constitutional amendment, it needed to be approved by 60% of those voting on the referendum or by 50% of all voters in the election.

Despite the failure of the 2020 ballot measure, there are still ongoing efforts to eliminate the flat tax in Illinois. State Sen. Robert Martwick and state Rep. Curtis Tarver have introduced bills to amend the Illinois Constitution to remove the flat tax protection. The proposed amendments continue to be a topic of debate, with supporters arguing for greater tax fairness and opponents expressing concerns about potential negative impacts on the state's economy and taxpayers.

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