By: Ted Dabrowski and John Klingner
One of the latest ads from Illinois’ progressive tax proponents deserves a fact check. Here’s their video: https://www.facebook.com/104919517531062/videos/3079797422131585
The ad says, correctly, that middle-income workers in Wisconsin and Iowa pay lower tax rates than millionaires. From there, the ad jumps to a claim that Illinois has “one of the most unfair tax systems in America” because everyone in Illinois pays the same flat tax rate of 4.95 percent. It also makes a second claim that Illinois is “one of the only states where everyone is forced to pay the same tax rate.”
Both of those claims are false. The ad cherry-picks Iowa and Wisconsin as examples, ignoring that Illinois’ other neighbors all have flat or near-flat tax rates. In total, the U.S. has nine states with flat tax rates and another nine states that don’t tax working income at all. That makes 18 states that tax everyone at the same rate.
And the ad also ignores another 18 progressive tax states that tax both middle-income earners and millionaires at the same marginal tax rates.
The other big claim the ad makes is that 97 percent of Illinoisans will pay the same or less under the progressive tax rates proposed by the legislature. That may or may not be true initially, but it certainly won’t be in the future.
Here are the facts about Illinois’ supposed “most unfair tax system:”
1. The ad ignores that Illinois is nearly surrounded by flat tax, or near-flat tax, states. Michigan has a flat tax just like Illinois. All Michiganders pay the same rate of 4.25 percent. The same goes for residents in Indiana, with a flat tax of 3.23 percent. Kentuckians, too, pay a flat tax rate of 5.0 percent.
And Missouri’s progressive tax structure is essentially flat, taxing all income above $8,424 at a rate of 5.4 percent.
Low- and middle-income workers and the wealthy in those states all pay basically the same rate.
2. It’s not just Illinois’ neighbors that have a flat tax structure. Colorado, Pennsylvania, North Carolina, Massachusetts and Utah also have flat tax schemes. Again, in those states everyone pays the same tax rate.
3. Then there are the nine zero income tax states. Tennessee, Florida, Texas, Washington, Nevada, Wyoming, South Dakota, Alaska and New Hampshire – they don’t tax anyone’s working income. It’s the same zero income tax rate for everybody. (Tennessee and New Hampshire do tax investment income).
In all, there are 18 states nationally that tax low-, middle- and wealthier-income taxpayers at the same rate. But there are even more states that do so when you consider many have nearly-flat progressive tax structures.
4. Many “progressive tax” states tax low- to middle-income workers at the same marginal rate as millionaires. Eighteen of them, in fact. The table highlights those states. For example, Georgia taxes all income above $7,000 at the marginal rate of 5.75 percent. Idaho’s top marginal rate is 6.93 percent on all income greater than $11,554. Neighboring Missouri has a top rate of 5.4 percent on all incomes above $8,424.
The reality is, Illinois is far from “one of the only states” to essentially treat low- to middle-income workers the same as millionaires. Thirty-five other states do the same.
5. Many progressive tax states hit the middle class harder than Illinois does today. Almost all of the top tax rates in the table are higher than the 4.95 percent Illinoisans pay today, before taking exemptions and deductions into account. Just go down the list. Nebraska’s top rate is 6.84 percent on incomes over $31,160. That’s certainly not “millionaire” income levels. Nor is it in Iowa, where residents pay a max of 8.53 percent on the income they make over $73,710. In that whole group of states, only New Mexico has a top rate that’s lower than Illinois’ current flat tax.
Illinois is already the “least tax-friendly state” in the nation, according to Kiplinger. Illinoisans pay the country’s highest property taxes, the third-highest gas taxes and the sixth-highest combined sales taxes. A progressive tax structure would give lawmakers power to adjust both Illinois’ income tax rates and brackets, which risks making the state even less competitive on overall tax burdens.
Here’s the truth about the ad’s claims that 97 percent of Illinoisans will pay the same or less income taxes under the progressive tax rates lawmakers have proposed:
6. The 97 percent claim may or may not be true initially, but it certainly won’t be in the future. Illinois’ deficits, pension costs, unpaid bills and growing expenses will cause politicians to raise tax rates on middle-income residents. Lawmakers have never presented detailed numbers proving the 97 percent claim nor that their rates can raise the amount of revenue they project, especially now considering the economic impact of COVID-19.
The only thing we do know is that the proposed rates will go into effect on January 1 if the constitutional amendment is passed. And there is nothing to stop lawmakers from passing new rates and brackets at any time.
More hikes are inevitable because the proposed progressive tax rates raise only $3.6 billion in new revenue, far short of the amount necessary, absent major spending reforms, to cover Illinois’ annual structural deficits, it’s unpaid bills, the true costs of state retirements and more.
Add up all those costs and politicians need to raise $10 billion in new revenues annually. Wirepoints calculated new tax rates based on those needs and found that marginal income tax rates would grow to 9 percent on middle-income residents and to more than 11 percent on the wealthy. (The example here is, of course, just one of many potential rate structures, but it’s a fair representation of rates spread out across middle-income and wealthy taxpayers.)
And then there’s the billions in new spending that tax proponents have publicly and repeatedly promised the progressive tax will also pay for, including billions in additional K-12 education funding and billions for property tax relief.
To raise $15 billion, marginal rates would have to double for the middle class and nearly triple for Illinoisans making more than $1 million a year.
The reason why is simple: middle- and lower-income taxpayers make a majority of the income in Illinois. Two-thirds of Illinois’ taxable income rests with residents that make $250,000 or less a year. If lawmakers don’t want to pass reforms, they’ll have to go after middle-income residents.
Illinois is in the worst financial position of any state in the country (see Part 1 of our latest Special Report: Illinois is the Nation’s Extreme Outlier). It has the worst credit rating in the nation, just one notch from junk. It has $241 billion in state pension debts, the most in the nation. It has the country’s biggest population losses, with 170,000 people lost since 2010. And it has some of the highest taxes, including the nation’s highest property taxes. Without major reforms, Illinois will need billions more to keep its finances from collapsing.
That means the potential tax rates shown above aren’t out-of-line. In fact, they’re in the realm of California’s current rates. That may sound outrageous to some, but that’s the reality of Illinois’ finances.
The Golden State hits its wealthiest residents with marginal tax rates above 10 percent, but it also hits lower- and middle- income groups with high rates as well.
To extract the money it wants, California hits income between $32,960 and $45,753 with a marginal tax rate of 6 percent, and the rates only go up from there. Additional income between $45,753 and $57,824 is taxed at 8 percent. And additional income between $57,824 and $295,373 is taxed at 9.3 percent.
In the absence of reforms, especially pension reform, those are the same sort of rates Illinoisans can look forward to when Illinois lawmakers are finally forced to fill in the state’s structural deficits and pay for all the new spending they’ve promised.
Read more about how a progressive tax would hurt Illinoisans:
- Illinoisans need pension reform, not tax hikes
- Yes, the rich are fleeing Illinois and they’re taking billions with them
- Progressive tax states lose people, income to flat and zero income tax states
- Solving Illinois’ Pension Problem | Part 1: Illinois is the Nation’s Extreme Outlier
- If the wealthy flee, ordinary Illinoisans will be left holding the progressive tax bag
- Don’t be fooled by claims that a progressive income tax for Illinois would mean property tax relief
- Illinois enacting a progressive tax is like Sears attempting a turnaround by hiking prices