This November, Gov. J.B. Pritzker hopes to convince voters to do away with the state’s current flat-rate tax structure and adopt progressive rates that require higher earners to bear a larger portion of the tax burden. However, a closer look at how some states that adopted progressive tax rates have fared in recent years is a clear indication of what lies ahead for Illinois should taxpayers vote in favor of progressive tax rates later this year.
Critics argue a progressive income tax would cause the wealthy to flee to other places where they are not so heavily taxed, resulting in lower than anticipated tax receipts from the wealthy and a higher tax burden on the middle class.
“This vote is an affront to taxpayers and it is disheartening that the Senate voted to give themselves a blank check paid for by beleaguered Illinois taxpayers. When politicians get more tax power, Illinoisans get higher taxes," Americans for Prosperity-Illinois said in a press release after the Illinois Senate passed the bill allowing for the referendum.
Illinois Democrat gubernatorial candidate J.B. Pritzker during the canvas kickoff in St. Charles last week.
The Senate support did not include a single Republican.
"Should voters approve the referendum, Pritzker has already signed into law the new rate structure that would take effect," Orphe Divounguy, chief economist for Illinois Policy, wrote in an article published by the journal. "It is a $3.4 billion tax hike on individual taxpayers and businesses in Illinois."
Middle- and lower-income taxpayers often cheer when politicians make mention of shifting the tax burden away from them and piling it onto the wealthy to generate additional revenue for governments. On its face, it seems noble – let those who can afford to pay more in taxes take one for the team and help those who can’t. But reports on what happened in California and Connecticut after voters were sold on the idea to tax the wealthy more show both economies took a hit.
In 2012, California’s then-governor Jerry Brown proposed a similar progressive tax plan to voters. Only those earning more than $250,000 (the top 3 percent) would be impacted and the state would solve its financial woes and enjoy economic prosperity when all was said and done.
Well, California’s decision to adopt progressive tax resulted in wealthy residents fleeing the state. According to a paper by Stanford University researchers, 40 percent of higher earners were more likely to leave the state after California voters passed progressive income tax. This led to a 45.2 loss of revenue the state was expecting to receive from the wealthy who left.
"California voters were persuaded to pass the Temporary Taxes to Fund Education, Proposition 30," Divounguy wrote. "It turned out the taxes were neither temporary nor did they fund education in the way voters expected. The rates are still in place and a Stanford University public policy expert determined all the education funding went to pensions rather than classrooms."
Connecticut adopted progressive tax in 1996 and phased it in over the course of three years. The middle class did not receive the relief in income taxes or property taxes as promised. Since then, taxpayers have repeatedly faced hikes in income and property tax.
Since 1999, income tax rates have increased by more than 13 percent for Connecticut households, and the property tax burden has shot up by more than 35 percent. Changing to the progressive tax policy reportedly cost the state more than $10 billion and 360,000 jobs.
"Connecticut’s experience is a warning that switching to a progressive income tax will eventually end in a tax hike on Illinois’ struggling middle class, result in fewer jobs – particularly for those on the margins of the labor force – and increase poverty. It will fail to combat inequality or fix the state’s finances," Divounguy wrote in another article.
Writing for the Tax Foundation in 2012, William McBride said the results of a progressive tax are clear.
"... The results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions and monetary policy," McBride wrote.
McBride added that a progressive tax serves as a disincentive to entrepreneurs to invest and build capital.
"Progressive taxation also reduces investment, risk taking and entrepreneurial activity since a disproportionately large share of these activities is done by high income earners," McBride wrote.
Democratic Party presidential candidate Sen. Bernie Sanders of Vermont supports higher taxes for the wealthy at the federal level and has proposed a wealth tax of up to 8 percent per year at the federal level. What this would mean is that billionaires would have their wealth cut in half over the course of 15 years. Beginning with people with more than $32 million, the progressive tax would be 1 percent and climb to 2 percent for those with more than $50 million – all the up to an 8 percent rate on wealth more than $10 billion.
Each year, whatever amount of money is remaining would be taxed the following year.
The U.S. federal tax system already follows a progressive tax system. Taxpayers who earn more pay more in taxes. An analysis of the 2016 tax data by Tax Foundation revealed that the bottom 50 percent of taxpayers, who had a gross income of $40,078 or below, paid a mere 3 percent of all income taxes that year.
Meanwhile, the top 1 percent of all taxpayers – who grossed $480,804 and above – paid 37.3 percent of all federal tax income, meaning that these taxpayers contributed more income tax collectively than the bottom 90 percent whose taxes accounted for 30.5 percent of all income taxes.
"Just like in California, further tax hikes on Illinois’ already overburdened taxpayers are not going to solve the state’s financial problems. Illinoisans would be wise to learn from California’s and Connecticut’s mistakes," Divounguy said.