Overshadowed by the Biden/Trump hoopla this election cycle is a major initiative on the Nov. 3 ballot that should not be overlooked. In fact, its success or failure will have a dramatic impact on the fiscal solvency of the state moving forward.
The ballot initiative will ask voters whether the state should scrap it’s flat income tax rate, where everyone pays the same tax regardless of income, or move to a gradual structure where individuals who make over $250,000 will pay more in taxes. Additionally, any individual making below that will either pay the same or less.
This initiative has opened the floodgates of big money by interest groups to urge voters to accept or reject it. Billionaire Ken Griffin has dumped nearly $47 million against gradual taxation while Gov. JB Pritker has likewise dropped about $56 million into the “yes” initiative.
With so much money being dumped into both campaigns, this can result into a major retract from facts (where have we seem this before?). It’s never easy to get anyone to vote on an initiative when it involves their income and understandably so. As Upton Sincliar once wrote, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
Big money has intentionally perpetuated misinformation and myths to cast doubt and fear on gradual taxation. However, evidence suggests that gradual taxation is the most optimal structure and used by more than half of states and the federal government.
First, a couple notes on taxation. When policymakers look to design and implement a tax, they analyze all alternatives to see what structure will yield the most efficient output. If the tax is too high, this may yield negative results on demand. Additionally, if too low there will be not enough revenue collected to allocate to public services and programs. This sweet spot is sometimes referred to by economists as “optimal,” in which the output of the tax maximizes social welfare subject to budgetary constraints.
Perhaps the most leading scholars in this field are economists Emmanuel Saez and Peter Diamond (a former Nobel Prize winner). Their research suggests that gradual taxation not only enhances equity, but also raises revenue and yields positive economic impacts compared to a flat structure.
Proponents in the “yes” camp have primarily made this initiative about equity and it’s a valid claim. It is likely that most people would agree that a teacher, police officer, or firefighter pays a higher share of their income than a CEO, investment banker, or surgeon. But a better answer on why gradual taxation produces equity is due the regressive economic impact of a flat structure. According to the Institute on Taxation and Economic Policy, Illinois has the 8th most regressive state and local tax system where a higher share of the burden is placed on middle and lower income households. The poorest 20 percent (who make less than $21,800 per year) pay about 14 percent as a share of family income in taxes, while the top 1 percent (above $537,400) pay roughly 7.4 percent. The middle 60 percent ($21,800 to $109,500) pay 12.2 percent in taxes as a share of family income. The end result is a hindering of economic mobility. In effect, it is no surprise that 32 of fifty states plus the federal government already operate on a gradual structure.
But what of the job killing? Wouldn’t increasing taxes on those making over $250,000 discourage them to create jobs or cause them to move out of state? Data suggests otherwise.
Neighboring Midwest states, such Wisconsin, Iowa, and Minnesota, have gradual structures. Wisconsin has a top marginal rate of 7.65 percent, Iowa has a top rate of 8.53 percent, and Minnesota has a top rate of 9.85 percent.
Gradual taxation had no effect on population trends as Wisconsin’s population grew by about 3 percent, Iowa about 4 percent, and Minnesota about 7 percent from 2009 to 2019. The unemployment rate for all three states deceased nearly every year heading out of the Great recession. Gross Domestic Product (GDP) grew by an average of 4 percent for each state since 2009. GDP per capita also grew by at least 1 percent each year as well for all three states the last decade.
Gradual taxation also increases state revenue, allowing the state to tackle the pension debt, fix property taxes, and further invest in infrastructure and schools. The state is projecting an extra $3.4 billion from the newly graduated structures in 2021.
There will people who will still reject the benefits of gradual taxation, still fixated that gradual taxation will lead to more taxes across the board. True, gradual taxation will not fix all of the state’s issues. However, it will be a step in the right direction toward fiscal solvency and provide the state with a more optimal structure than current.
Chris is the founder and Executive Director of Prairie State Policy. He holds a MPA and graduate certificate in informatics from Northeastern University.