The Fair Tax: Illinois Cannot Get "Out" Without It

The Fair Tax: Illinois Cannot Get "Out" Without It
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The "Fair Tax"--an income tax system under which people with higher incomes pay a higher tax rate and people with lower incomes pay a lower tax rate--is smart tax policy. This is the way that the federal personal income tax works, as well as how the state personal income tax works in almost all of the 41 states that have such a tax. Except Illinois.

The Fair Tax fulfills model tax policy goals in three critical ways. First, it is fair in that, unlike a flat tax, it taxes based on individuals' and businesses' ability to pay. Illinois's current system is deeply unfair; overall, it calls upon the lowest income households to devote a percentage of their income to state and local taxes that is three times higher than the highest income households. Second, a Fair Tax can be used to raise adequate revenue needed to fund vital services without necessarily increasing burdens on lower and middle income people and small business owners (and indeed potentially reducing those burdens). Third, a Fair Tax is sustainable because it is "elastic," meaning that it captures revenue from the part of the economy that is growing (the upper strata of the personal income brackets), so that revenue grows naturally as the economy grows and thus keeps pace with the cost of living on the spending side.

Remarkably, not only does Illinois not currently have a Fair Tax, our state constitution forbids it. The lack of a Fair Tax makes the Illinois revenue system poorly designed and chronically inadequate. In fact, this poor design lies at the heart of Illinois's current budget crisis. The poor design of the Illinois revenue system, led by the lack of a Fair Tax, keeps Illinois from capturing needed revenue from the growing part of the state economy.

Because of this poorly designed tax system, Illinois's revenues grow slowly and do not keep pace with ordinary increases on the spending side caused by inflation and population growth. Thus the gap between revenue and spending inexorably widens, year in and year out. Filling this gap requires revenue reform, especially the Fair Tax.

Over many years Illinois lawmakers have clung to the poorly designed system and, instead of reform, have deployed stopgap measures to make up for inadequate revenues and "balance" the annual budget. These measures have included establishing a lottery, selling the lottery, establishing gambling boats, selling state property, increasing the state's debt and re-financing the debt. Among the most well known stopgap measures have been raiding special state funds earmarked for other purposes, skipping pension payments, and imposing long delays on payment of Medicaid bills.

Illinois's dysfunctional revenue system has had dire consequences for state residents. Illinois now has one of the lowest percentages of any state in the state share of education funding. This puts pressure on property taxes, already among the highest in the nation, as local property tax levies must make up for the lack of state support for education. Illinois has become a horrible partner to contracting organizations that provide state-funded services, such as mental health treatment, services for individuals experiencing homelessness , sexual assault prevention and treatment, job training, and much more. Illinois pays rates for these services far below what they cost, pays late, unilaterally alters contracts, and now, in the midst of the budget crisis, simply ignores the payment of these bills. Illinois cannot make smart investments in universally valued and high-return programs like early childhood services, universal pre-school, and preventive health care.

The root of the problem is Illinois's poorly designed revenue system. All of the problems stemming from inadequate revenue described above were evident before the Great Recession. The temporary 5% personal income tax rate imposed in 2011 was not reform--it generated desperately needed revenue to help cope with the recession, but it did not fix the problem. The rollback of the personal income tax rate to 3.75% last year took this desperately needed revenue out of the state's coffers and turned it into leverage for Governor Rauner's policy agenda, for which he is holding the whole budget hostage. But the governor's policy agenda does not get at the root problem either; it grinds an ideological axe about organized labor, but it does nothing to fix Illinois's revenue system.

The problem is not, and never was, on the spending side. Illinois has the 5th highest overall state gross domestic product but is 33rd in state spending as a percentage of gross state product. All of the major drivers of general funds spending--education, healthcare, human services, and public safety--have long enjoyed consensus support. Everyone agrees that, even in the best of times, this spending should be made efficiently, honestly, and transparently. But elimination of every penny of "waste, fraud and abuse" would not scratch the surface of the structural deficit created by Illinois's dysfunctional revenue system.

For Illinois to get all the way "out"--that is, to actually fix the structural problem that has plagued it for decades and fairly and sustainably raise revenue adequate to support consensus spending needs and make smart investments, Illinois needs true revenue reform. An essential part of that reform is the ability to enact a Fair Tax, which requires a constitutional amendment.

Senate Joint Resolution Constitutional Amendment 1, sponsored by Sen. Harmon, would put the necessary constitutional amendment on the ballot. In order to be on the ballot in November, it needs to pass both chambers of the General Assembly with three-fifths super-majority votes by May 10. Join the Shriver Center in supporting this long-term solution to the Illinois's chronic budget issues.

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