A graduated income tax could put Illinois in the clear

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Instituting a progressive income tax in Illinois would destroy the economy and drive people to flee the state, according to Gov. Bruce Rauner and his supporters.

After the economic refugees got over the border, however, they’d have to keep running.  That’s because income tax rates are higher in every bordering state, according to a recent study by the Illinois Economic Policy Institute.

Illinois currently has a flat 3.75 percent individual income tax.  Indiana is the only neighboring state with a flat rate – it’s 3.3 percent. But Indiana permits counties to levy income taxes, and the average county rate is 1.5 percent.

The other states have progressive rates; the lowest is Missouri’s, which rises in steps from 1.5 percent to 6 percent – that’s for people earning less than $1,000 a year and those earning over $9,000 a year, respectively.  Wisconsin’s top rate, which is for individuals earning over $69,000 a year, is 7.65 percent; Iowa’s is 8.9 percent for people earning over $60,000.

Looking at the combination of state and local taxes, all the states have regressive tax structures, with poor people paying a higher proportion of their income than the wealthy.

But Illinois is the worst. Here the bottom fifth of earners pay 13 percent of their income in state and local taxes, while the top 1 percent pays 4.6 percent, or about a third of what poor people pay.

Compare that to Wisconsin, where the bottom fifth pays about 9 percent of its income, and the top 1 percent pays a little over 6 percent.

Progressive taxation is fairer, since the people who pay more are those who can afford to, and it’s also more efficient and stable because it taxes the sector that has benefited from economic growth for the past several decades.

But perhaps the most interesting statistic – particularly with our accumulated budget deficit topping $9 billion and growing – is how the neighboring states bring in much more revenue than Illinois.  That’s not just from a smarter income tax; it’s because unlike Illinois, they’ve all extended their sales taxes to cover services, and they all tax some retirement income.

Adopting Indiana’s tax structure would give Illinois $4.6 billion more each year.  Using Iowa’s structure would bring in $7.3 billion more, and Wisconsin’s would yield $8.3 billion more.

That would put Illinois in the clear.

House Democrats have introduced a constitutional amendment to permit a progressive income tax; and if that’s passed, they will introduce legislation that would provide a tax cut to all but the wealthiest taxpayers in the state and raise an additional $1.9 billion a year.

Under that plan, introduced by Rep. Lou Lang, D-Skokie, the tax rate on incomes up to $100,000 (twice that for couples) would be reduced to 3.5 percent. It would rise to the current rate of 3.75 for income up to $500,000, to 8.75 for the next $500,000, and to 9.75 for income over $1 million ($1.5 million for couples).

According to Voices for Illinois Children, that means a couple earning $1 million would pay an additional $11,785 in income taxes.

That’s probably not enough to cover their costs of relocating — especially when they’d end up paying higher taxes if they moved next door.

Lang’s proposal doesn’t put Illinois’ budget in the black, but it goes part of the way.  According to the Center for Tax and Budget Accountability, the state could raise an additional $2 billion by extending the sales tax and another $1 billion by taxing retirement income over $50,000.  And there are huge corporate tax loopholes that are ripe for the closing.

For decades, Springfield Democrats have shied away from these kinds of reforms, putting their political fortunes ahead of fiscal responsibility.  Now Rauner has brought the state to the brink of disaster; maybe the legislature will muster the courage to act.