An Illinois Tax Crossroads – WSJ


Gov. J.B. Pritzker responds to questions during news conference in Chicago, Aug. 10.



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Anthony Vazquez/Associated Press

Illinois is the nation’s leading fiscal basket case, with runaway pension liabilities and public-union control of Springfield. But it has had one saving grace: a flat-rate income tax that makes it harder for the political class to raise taxes. Now that last barrier to decline is in jeopardy on the November ballot.

The peril comes in a ballot measure backed by Democratic Gov. J.B. Pritzker and his party’s supermajority in the Legislature. A yes vote would amend the state constitution to replace the current 4.95% flat levy with a progressive rate structure on individual income. Gov. Pritzker, an heir to the

Hyatt

hotel fortune, is pitching this “Fair Tax” as a modest plea for more revenue from “wealthy people like me.” Hardly.

Democrats have announced a slate of new rates that will be imposed automatically if the measure passes. The current flat rate of 4.95% would rise to 7.75% for households earning above $250,000, with a top rate of 7.99% on incomes above $1 million. Proponents are also touting a planned tax cut for those making less than $250,000. But with a new bottom rate only 0.2 percentage point below the current one, taxpayers in that range can expect savings barely enough for an order of deep-dish pizza.

Mr. Pritzker says the economic slowdown requires raising more state revenue. But as the Prairie State’s own Barack Obama put it in 2011, “You don’t raise taxes in a recession.” Illinois’s unemployment rate in August was 10.9%, more than two points above the national average. The new tax scheme would further slow the jobs recovery by lifting the corporate tax rate to 7.99%, and by increasing the pass-through taxes paid by more than 100,000 small-business owners, according to the Illinois Policy Institute.

The tax increases won’t stop there. The political virtue of a flat tax is that it requires raising taxes on anyone who earns income. With a progressive structure, politicians can claim they’re only raising taxes on “the rich.” The state soon becomes beholden to affluent taxpayers for 40% to 50% of state tax revenue, even as the affluent increasingly leave the state.

Here the pattern of other blue states is instructive. Democratic governors have often lowballed voters with modest rates when introducing a new tax, only to ratchet up the levels in each administration. Take New Jersey, where Gov. Phil Murphy struck a deal recently to impose a 10.75% levy on earnings above $1 million. The move was only the latest of decades of increases that voters have been helpless to stop.

New Jersey first taxed individual income in 1976 amid a national revenue slump, with a top rate of 2.5%. Low rates held for 15 years before Democratic Gov. James Florio raised the tax to 7% on the wealthy and middle class. Voters revolted and swept underdog challenger Christine Todd Whitman into office in 1994. Yet facing a hostile statehouse, she secured a mere 0.63-point cut. A decade later Democrats raised the top rate to 8.97%, and last year Gov. Murphy added the 10.75% rate, which he expanded last month to reach more taxpayers.

Or take Connecticut, please. For decades its lack of an income tax lured New York workers and businesses, but Gov. Lowell Weicker introduced the tax in 1991, promising it would fix the state fisc. It didn’t, and the original 1.5% rate has since been raised five times to today’s 6.99%. The progressive tax ratchet is always up.

For evidence of the slippery slope ahead, Illinois voters can look at the trend in public debt. This month

Moody’s

warned that the state’s annual liabilities will exceed 45% of gross domestic product by 2021—the deepest fiscal hole in all 50 states. A progressive income tax would free lawmakers to shovel more money down that hole rather than address excessive government pensions.

Each year when revenues fall short of their target, or spending soars from public-union demands, expect Democrats to announce that still more taxpayers aren’t paying their “fair share.” Mr. Pritzker admitted as much only 100 days into his term when he said his plan includes “no guarantees” against raising taxes on the middle class.

If the progressive income tax passes, more residents will likely resort to the alternative of moving out. Illinois led the nation in out-migration over the past decade, with its population declining in each of the past six years, according to the Census Bureau. A 2019 survey by NPR Illinois and the University of Illinois found that high taxes were the top reason respondents gave for leaving.

The flat tax is the last structural political obstacle to the continued plundering of Illinois taxpayers by the Democratic-union ruling class. It’s also the only remaining discipline that might force lawmakers to reform runaway pensions. If taxpayers give Mr. Pritzker and the entrenched Legislature their way, they will accelerate the decline of a once great state.

Main Street: Wednesday night’s prime-time face-off between Mike Pence and Kamala Harris could be the most consequential vice-presidential debate ever. Images: AP/Reuters Composite: Mark Kelly

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Appeared in the October 6, 2020, print edition.



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