If Illinoisans were to take Democratic candidate and likely future governor J.B. Pritzker at his word, additional spending on his campaign pledges would either require households making more than $150,000 to have the highest state income tax rate in America or, as a new report puts it, “punish the wallets of both the middle class as well as the wealthy.”
The Chicago billionaire has been notoriously silent on the details of how he would pay for a host of new spending he's promised, including balancing the state budget, higher public pension contributions, a host of new programs, and a $5 billion swap of public education spending previously paid by property taxes.
Because Pritzker hasn't give any indication of exact costs, estimates have ranged from $18 billion by the Illinois Policy Institute to $10.7 billion by political blogger Rich Miller.
Using the lower estimate of $10.7 billion after accounting for an estimated $500 million in new revenue from legalized marijuana and expanded gambling, the nonprofit Wirepoints said it couldn't find a situation where the wealthy pay rates that are politically possible while the middle class avoids a significant hike.
“If he wants to spend that much, it will hit the middle-income sector,” Wirepoints President Ted Dabrowski said. “No doubt about it.”
Dabrowski's estimate that keeping the income tax at 4.95 percent for income below $150,000 would require a household making more than that to pay 13.6 percent in income tax. The highest income tax rate in America is California’s 13.3 percent rate for income above $1 million.
“This would be an extreme tax hike that would hit entrepreneurs and [other] people at a destructive rate,” Dabrowski said. “If you take Pritzker at his word that only he and Bruce Rauner should pay more, then it gets crazy.”
Dabrowski's models show that increasing taxes on income only over $1 million would require a tax rate of 24.3 percent to pay for Pritzker's new spending, a near 500 percent increase from existing levels.
Some 600 Illinois residents account for more than half of the state’s $76 billion in taxable income earned by millionaires. For example, if both Pritzker and incumbent Gov. Bruce Rauner moved out of state to avoid the higher income tax, that would cost the state $23.9 million in tax revenue based on the income reported in both candidate's tax returns.
The Illinois General Assembly has pushed for a “millionaire tax” referendum multiple times in recent years.
The Tax Foundation estimated that 54 percent of Illinois’ small businesses would have been affected by the proposal in 2014.
The Institute on Taxation and Economic Policy says Illinois has one of the most regressive taxes in the nation, largely due to its flat income tax. In its annual “Who pays?” report, the institute said the poorest 20 percent of Illinois households pay 14 percent of their income in taxes because of the flat tax in addition to high sales and property taxes.
Dabrowski's estimates assume that no one would leave Illinois for a lower-tax state. Illinois has already seen significant outmigration in recent years.
Another aspect of the $10.7 billion spending increase figure is that it may be too low depending on how much Illinois will need to fund local schools.
Miller’s estimate included a $5 billion increase in state funding for local education in an effort to lower property taxes. Rauner’s State Board of Education estimated that it would need an additional $7 billion in state money so that schools would reach “adequacy” levels mandated under the new school funding formula. That estimate didn’t reduce property taxes that largely go to schools. Pritzker has said he wants to cut property taxes those in half.
Lawmakers just passed a $5 billion tax hike on personal and corporate income in 2017.
Putting a progressive tax structure in place would take time. Changing Illinois’ flat income tax to one that takes a higher percentage from higher income would require the General Assembly to approve a Constitutional amendment that then goes before voters in the 2020 election. Should it be approved at the ballot, lawmakers would then be tasked with setting rates in 2021 that wouldn’t take effect until July of of that year.
In the meantime, Dabrowski said the administration could raise the state’s flat tax enough to collect the desired revenue and then give favored groups and income levels tax exemptions to keep them from paying a much higher tax.