The Fair Tax Constitutional Amendment Should Not Lock the Lowest and Highest Marginal Income Tax Rates Together

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By Dan Lesser –

A centerpiece of Governor JB Pritzker’s campaign was his support for amending Illinois’ State Constitution to allow a Fair Tax, whereby the wealthy would pay higher income tax rates and those of lesser means would pay lower rates. A Fair Tax is needed because it is the primary means by which the state can raise adequate revenue to meet its fiscal challenges. The State must do so in a manner that takes into account the different abilities of Illinoisans to pay based on disparate incomes.

The Civic Federation has proposed that the constitutional amendment allowing for a Fair Tax include a provision limiting the marginal income tax rate on the highest incomes to no more than 3 percentage points over the marginal income tax rate on the lowest incomes. But locking the lowest and highest marginal rates together is bad policy and contrary to the underlying purposes for enacting a Fair Tax.

1. If the spread in marginal income tax rates between the highest and lowest income people were limited to 3 percentage points, lower income people would continue to pay a much higher share of their income on the three principal state and local taxes—income, sales and property—than wealthy people.

The Civic Federation’s example of how their 3 percentage point limitation on the spread would work assumes that the lowest income quartile would have a marginal tax rate of 3.25%, the next highest quartile would be 4.25%, the next would be 5.25%, and the highest would be 6.25%. The Institute on Taxation and Economic Policy (ITEP) compared this policy proposal to a baseline of current law and found the impact described below on the distribution of tax burdens in the state.

The first bar graph below shows the percent of income that Illinoisans at different income levels pay in combined income, sales, and property taxes under current Illinois law. The second bar graph below shows the percent of income that Illinoisans at different income levels would pay in combined income, sales, and property taxes under the Civic Federation’s proposal to limit the difference in marginal tax rates to 3 percentage points.

As the first graph shows, the lowest income quintile currently pay 14.4% of their income on the three main state and local taxes while the wealthiest 1% pay only 7.4% of theirs. Thus, the poorest Illinoisans now pay 7% more of their income on state and local taxes than do the wealthiest.

As the second graph shows, if the spread between the highest and lowest marginal income tax rates was limited to 3 percentage points, the lowest income quintile would pay 13.5% of their income on the three main state and local taxes while the wealthiest 1% would pay only 8.5% of theirs. Thus, the poorest Illinoisans would still pay 5 percent more of their income on the three main state and local taxes than would the wealthiest—little improvement over today’s extremely unfair distribution of tax burden.

Current Illinois Law

Civic Federation Proposed Rate Structure

 

 

 

 

 

 

 

 

 

Moreover, tax systems that require low-income people to pay a higher percentage of their income on state and local taxes than do wealthy people have a disparate racial impact. The poverty rate for people of color is 2.5-3 times that of whites, a legacy of past racism and the ongoing damage caused by continuing bias and discrimination. We should not amend our state constitution to include a provision that perpetuates existing inequities. In fact, we should be taking greater steps to correct them.

2. Limiting the spread between the highest and lowest marginal income tax rates does not raise enough revenue.

Our state has a great need for new revenue to restore the massive cuts to human services and higher education that have occurred, meet our commitment to increase spending on K-12 by at least $350 million per year, rebuild our infrastructure, address our pension debt, and pay our back bills, in addition to other responsibilities. By its own admission, the Civic Federation’s illustrative income tax rates would raise less than $1 billion, falling woefully short of meeting our state’s needs.

3. Since virtually all income growth over the past 25 years has occurred at the high end, limiting the percentage of income that the wealthy can be taxed would perpetuate our revenue system’s chronic structural deficit and further exacerbate income inequality and its associated social costs.

This country has seen a steady growth in income inequality over the past three decades. According to the leading experts, looking at the period of 1980-2014, income has grown by 21% for the lowest 50%, by 194% for the top 1%, and by 298% for the top 0.1%. Our tax policy must have the flexibility to adjust to this imbalance in economic growth if it is to raise sufficient revenue fairly.

Moreover, extreme income inequality creates many social costs that tax policy can either help to alleviate or continue to perpetuate. Data proves that income inequality leads to higher poverty rates that limit social mobility. The United States fares deplorably compared to other high-income nations on basic metrics of social health like infant mortality and incarceration rates because income inequality leaves many Americans behind. These social costs are especially acute in Illinois, which ranks 8th of the 50 states in income inequality. A Fair Tax Amendment that doesn’t provide the flexibility needed to tax people according to their very different levels of income will be a blunt tool in the state’s efforts to mitigate income inequality and these associated ills.

4. Constricting the difference between top and bottom marginal income tax rates and enshrining this limitation in the state’s constitution offers only a slight improvement over the state’s current flat tax.

The procedural burden for enacting a graduated income tax is high—requiring a super-majority of votes in both chambers of the Illinois legislature and majority support by the electorate. If the 3 percentage point limit is put into our state constitution, these same procedural burdens would make it difficult to subsequently raise taxes on the wealthy once the 3 percentage point limit is reached. This limitation would inevitably result in increased pressures to fund public services, higher reliance on regressive sources of tax revenue that disproportionately rely on those with lower incomes, and shrinking revenue tax bases as the personal income tax fails to align with where income growth is happening.

5. There is no empirical evidence that limiting the difference between the highest and lowest marginal income tax rates is necessary to prevent wealthy people from migrating out of Illinois.

Some have expressed the concern that raising the state income tax on high earners will cause them to leave Illinois, damaging our economy. However, Stanford University Professor Cristobal Young’s book, “The Myth of the Millionaire Tax Flight” makes clear that there is no evidence to support this myth despite anecdotes or threats by millionaires to move because of higher taxes.

In his book, Young examined 13 years of tax returns that reported at least a million dollars in income. From this data, he found that millionaires actually have lower migration rates compared to the general population (2.4 percent vs. 2.9 percent) and that just 0.3 percent of all millionaires move to a lower-tax state in a given year.

In a review of the book, the Institution on Taxation and Economic Policy summarizes Young’s findings as to why millionaires are less likely to move, which include:

  • Millionaires are more tied to where they are currently living: Most millionaires are married, are more likely to have children, and are economically and socially tied to where they made their money.
  • They benefit from where they are living because they have “home field advantage”: They know the area and have connections. Most are “working rich” and moving could actually set them back in their career and productivity.
  • There is a reason they chose to live there in the first place, whether that be career opportunities, the education and public services offered, or overall quality of life. By the time they are making enough to think about moving to save on their taxes they are already deeply embedded into their communities and living comfortably enough that the state tax savings at stake would not fundamentally change their quality of life even if they somehow did find a way to continue earning a very large income in a new locale.

Conclusion

None of the 33 states with a Fair Tax has a provision limiting the difference between the highest and lowest income tax rates. Income tax rates are a matter for the General Assembly and the Governor to decide, without the interference of an arbitrary limitation in the state constitution.

There simply is no legitimate reason to include this limitation. Its apparently intended purpose of keeping income tax rates low will have a negligible effect on tax migration in the state and will not promote economic growth.

Marginal income tax rates are only one component that goes in to determining income tax liability; what kinds of income are subject to tax and what exclusions, deductions, exemptions, and credits are offered are just as important in determining the ultimate incidence of the tax. Accordingly, marginal tax rates in isolation should not be the primary driver in designing new tax policy in Illinois, nor should they be the primary point of comparison in gaging differences across states. And most importantly, marginal income tax rates should not be enshrined in the state constitution. It makes no sense to isolate one component of a state income tax system and make it virtually unchangeable, especially when doing so would perpetuate inequities, prevent the state from raising sufficient revenue to meet its obligations, tie the hands of future lawmakers, and contribute to unending chronic deficits.


  1.  Also known as a graduated or progressive income tax.
  2. (March 9, 2018). Measuring the impact of a graduated income tax in Illinois. The Civic Federation. [Blog] https://www.civicfed.org/iifs/blog/measuring-impact-graduated-income-tax-illinois
  3. Wiehe, M., Davis, A., Davis, C., Gardner, M., Christensen Gee, L., Grundman, D. (October 17, 2018). Who pays? A distributional analysis of the tax system in All 50 States. Institute on Taxation and Economic Policy. https://itep.org/whopays/illinois/
  4. (December 18, 2018). Analysis produced by the Institute on Taxation and Economic Policy.
  5. (December 18, 2018). Analysis produced by the Institute on Taxation and Economic Policy.
  6. Fontenot, K., Semega, J. (2018). Income and poverty in the United States: current population reports. United States Census Bureau. https://www.census.gov/content/dam/Census/library/publications/2018/demo/p60-263.pdf
  7. Leachman, M., Mitchell, M., Johnson, N., Williams, E. (November 15, 2018). Advancing racial equity with state tax policy. Center on Budget and Policy Priorities. https://www.cbpp.org/research/state-budget-and-tax/advancing-racial-equity-with-state-tax-policy
  8. (March 9, 2018). Measuring the impact of a graduated income tax in Illinois. The Civic Federation. [Blog] https://www.civicfed.org/iifs/blog/measuring-impact-graduated-income-tax-illinois
  9. Saez, E., Zucman, G. and Piketty, T. Income inequality post-war, The Quarterly Journal of Economics, p. 578, Table 11.
  10. Gould, E. (January 8, 2014). Inequality is the main cause of poverty. Economic Policy Institute. [Blog] https://www.epi.org/blog/inequality-main-persistent-poverty/
  11. Chen, A., Oster, E., Williams, H. (2016). Why is infant mortality higher in the United States than Europe? American Economic Journal: Economic Policy 8 (2): 89-124. https://www.nber.org/papers/w20525
  12. Porter, E. (April 28, 2015). Income inequality is costing the U.S. on social issues. New York Times. https://www.nytimes.com/2015/04/29/business/economy/income-inequality-is-costing-the-us-on-social-issues.html
  13. Economic Policy Institute. (2018). The unequal states of America: income inequality in Illinois. https://www.epi.org/multimedia/unequal-states-of-america/#/Illinois
  14. Young, C. (2017). The myth of millionaire tax flight: how place still matters for the rich. Standford University Press. http://cristobalyoung.com/?page_id=57
  15. Institute on Taxation and Economic Policy. (May 1, 2018). “No need for the mythbusters, the millionaire tax flight myth is busted again.” [Blog].
  16. Kansas and Oklahoma are two states that slashed their state income tax rates in recent years and sent their economies into major tailspins. In contrast, Minnesota, a state with a booming economy and the greatest economic growth in the Midwest, has a top marginal income tax rate of 9.85%.

The Responsible Budget Coalition’s (RBC) website is hosted by the Shriver Center on Poverty Law (Shriver Center).