A new report on Illinois’ finances by the State Budget Crisis Task Force includes a few predictable findings -- the public pension system is underfunded, the Medicaid gap is growing -- but it also attacks the state’s income tax system, calling it out of step with the economic realities of the 21st Century.
When Illinois wrote a flat tax into its 1970 Constitution, the United States was a much more middle-class country. Income inequality was at a historic low, especially in industrial states with heavy manufacturing bases and large union membership. That, of course, has changed in the last 42 years. Chicago has lost all its steel mills, for one thing. If you look at this chart, you’ll see that the income of the average American has remained constant, while the income of the top 1 percent of Americans has tripled. But because Illinois has a flat tax, we can’t capture as much of those gains as we could if we were able to increase rates on high earners.
The State Budget Crisis Task Force is headed by former Federal Reserve Chairman Paul Volcker and former New York lieutenant governor Richard Ravitch. Other members include former Treasury Secretary Nicholas Brady, former Secretary of State George Shultz, and Alice Rivlin, who was director of the Office of Management and Budget. Here’s what it has to say about Illinois’s flat tax:
Illinois has a broad personal income tax base and a simple flat rate structure. Taxable income in Illinois is very similar to federal adjusted gross income (AGI) except that Illinois excludes all retirement income, which could be a significant source of revenue: over $1 billion in 2010. Retirement income is rising as a share of all income, which means that Illinois’ personal income tax base is gradually eroding.
Because Illinois has a flat tax rate with an exemption of only $2,050 per capita, the system has a roughly proportional burden across different income groups. This lack of progressivity in the personal income tax system, combined with the nationwide trend toward rapid growth of income among high-income individuals, has meant that income tax revenue has grown somewhat more slowly in Illinois than in states with a progressive tax system. However, Illinois’ flat income tax rate also means that personal income tax revenues are less volatile than they would be under a more progressive rate structure.
You can read the entire report here.