Who is that masked man?
Things bad begun make strong themselves by ill.
Illinois residents dodged a bullet on Tuesday when voters refused to change the Illinois constitution to allow state income tax rates to vary by income. Currently the constitution requires a flat income tax rate and the current rate is 4.95 percent. That means that if the government wants to raise income tax rates, it must do so for all income classes. That puts a brake on the legislature.
About 55% of Illinois voters voted against the change. That’s a more overwhelming victory than it looks because the change required a 60% vote to pass (or a simple majority of all of those voting in the election.)
Governor Pritzker’s (pictured above) and the Democratic legislature’s plan, had the measure passed, was to cut the rate very slightly (by at most 0.2 percentage points) for joint filers with income below $250,000 and single filers with income below $100,000 and to raise it for everyone with income higher than that. It would have reached a peak of 7.99% on income over $1,000,000 for joint filers and on income over $750,000 for single filers. That likely would have caused an even greater exodus of high-income people from Illinois than the current rate of exodus.
Similar attempts to impose a graduated rate structure in Massachusetts have also failed. The flat income tax rate there is 5.0%.
Once the flat tax barrier is breached, marginal tax rates at all real income levels tend to rise over time. I wouldn’t be surprised if a fair a number of voters in Illinois understood that.
Interestingly, just in my adult lifetime a number of states have adopted an income tax and the rate started low but went high because it was not constrained by such a constitutional provision.
New Jersey, for example, adopted an income tax in 1976, with two rates: 2.0% for income below $20,000 and 2.5% for income above $20,000.
By 2018, the marginal tax rate on singles with income between $35,000 and $40,000 was 3.5% and on married couples filing joint with income $50,000 and $70,000 was 2.45%.
$20,000 in 1976 dollars translated to $88,000 in 2018. So almost everyone was paying a higher rate in 2018 than in 1976. And the top two rates were 8.97% and 10.75%.
Similarly, Connecticut adopted an income tax in 1991, with a flat tax rate of 4.5%. Now the lowest rate is 3% and applies only to income below $10,000 for single payers and below $20,000 for married payers filing jointly. Everyone else pays rates that are higher than the original $4.5%. The rates range from 5% to 6.99%.
READER COMMENTS
Mark Brophy
Nov 5 2020 at 8:48pm
Real estate is crashing in Connecticut because the income tax has fueled massive government expansion.
Garrett
Nov 5 2020 at 9:46pm
Real estate has been a sine wave the last decade but is actually rising now due to COVID flight from NYC.
Boris
Nov 5 2020 at 10:05pm
It’s worse than that. It’s 7.99% on all your income if your income is over that line.
So for a married couple, going from $999,999 to $1,000,001 (to be safe; not sure how exactly $1 million is treated) increases tax liability from $70,935 to $79,900.
I still haven’t figured out who thought it was a good idea to have a discontinuity in the assessed tax like that and why everyone played along.
Matthias
Nov 5 2020 at 10:44pm
That’s rather weird.
I guess that discontinuity stems from a time when you could deduct your state income taxes from your federal taxes?
cosinedLoan
Nov 6 2020 at 8:24am
Even without the SALT cap at the federal level, there would still be a discontinuity in the tax liability graph as Boris illustrated.
robc
Nov 6 2020 at 11:24am
I don’t think it has changed, but the beer excise tax used to have the same issue at 2MM barrels.
It led to the tax on barrel 2,000,000 (or maybe 2,000,001) being over $600,000.
When both Yuengling and Sam Adams got near the limit, they paused for a few years at 1.9MM, then jumped to about 2.5MM bbls. You don’t want to limp across that line.
robc
Nov 5 2020 at 10:58pm
You can turn a flat rate into a progressive tax by having a very large standard deduction.
Vivian Darkbloom
Nov 6 2020 at 3:33am
“Governor Pritzker’s and the Democratic legislature’s plan, had the measure passed, was to cut the rate very slightly (by at most 0.2 percentage points) for joint filers with income below $250,000 and single filers with income below $100,000 and to raise it for everyone with income higher than that.”
In addition to the fact that Illinois voters are smart enough to know that “the plan” could more easily be changed than the constitution, the hope might also have been, not unrealistically, that the federal government, which faces no such constitutional restrictions, would come to the financial rescue of Illinois, particularly with a Democratic president in office.
But, Illinois voters should be careful what they wish (or vote) for. Illinois’ sales tax rate started at 2.3 percent in 1933. The state rate is now 6.5 percent and the average state and local rate is 9.08 percent, sixth highest in the country. The vast majority of voters in Illinois, like voters everywhere, are voting the perceived effects on their own pocketbooks, not micro-economics. The result of this vote might include lower Illinois spending, but almost certainly will result in even higher non-income taxes, such as the sales tax which, as measured by income, would be more regressive. If an increased sales tax were to be put on the ballot, I’m pretty sure it would fail by a much higher margin.
Thomas Hutcheson
Nov 6 2020 at 7:35am
What is the argument against a progressive state income tax? That a progressive consumption tax es better? A non-progressive consumption tax? Deficit financing?
What is the model, what is the maximand, and what are the constraints?
Alan Goldhammer
Nov 6 2020 at 9:03am
Maryland has a sliding rate that goes up to 5.75% for the high income bracket (>$250K taxable income). There is also an add on county income tax that varies by jurisdiction. Our county’s rate is 3.2% that gets added on. I look at this differently from probably everyone else who reads and posts on this blog. My principal question is whether the county delivers the right services for the funds they collect. If I can answer that in the affirmative, I gladly pay my taxes.
We have excellent public schools, a good library system, and lots of public parks. Our roads are well maintained and pothole free. My return on investment is excellent.
robc
Nov 6 2020 at 9:42am
I doubt it is that unusual on here. It would just be better if subsidiarity was applied. Federal taxes bother my a lot, they should be tiny. State taxes less so, county less than that. HOA dues even less so, and household budget items hardly at all.
If you flipped the federal tax and the local tax for each other, it would be a much better situation. Exact same amount collected, but it would be a better situation.
I would also prefer the total by lower, but that would be a good start, and would lead to that.
Alan Goldhammer
Nov 6 2020 at 12:04pm
If they truly cleaned up the tax code to eliminate all the preferences and loopholes, the tax rate could go down. My preference is for a VAT and that would take individual taxes down even further. With a VAT, one could eliminate the corporate income tax as well. Figure out what the operating budget is and plan the revenue stream accordingly. Pretty easy from a corporate fiance point of view.
robc
Nov 6 2020 at 12:22pm
I prefer a Single Land Tax of about 3.5% on the value of unimproved land value to replace all taxes at all levels. Maybe give the Feds 1/6th, the State 1/3rd, and Local the remaining 1/2.
I guess if we are dividing by 6, make it 3.6%.
0.6% to Federal, 1.2% State, 1.8% County/City (they can argue over how to split it).
Mark Z
Nov 6 2020 at 9:01pm
Given that Illinois is losing residents (especially tax-paying ones), mostly to lower tax states, it seems on average the returns on average are not worth the costs.
Michael Pettengill
Nov 6 2020 at 11:19am
Do you cheer the relative decline of U of Illinois Urbana in status and results as a great conservative anti-tax success?
I was part of the Midwest exodus with the rise of Reaganism, ending up in high tax New England. I left from Peoria in 1980 and its stagnation has been a positive for downstate Illinois, with growth in Chicagoland population matching the decline in the 90% of the “downstate” land area that isn’t Chicagoland.
To deal with the cost of getting the benefit of opportunity to spur growth, the Chicagoland area has gained regional authority to effectively tax to pay the costs, while the land based political power has cut the opportunity in most of Illinois. Eg, U of Illinois Urbana funding has been cut drastically making students outside Illinois much more important, along with the agendas of DC and industry outside Illinois. Students graduating will at best find opportunity in Chicagoland, but more likely in California or Texas cities.
I grew up in Indiana in the 50s and 60s when the GOP progressive industrial policies were drill building the infrastructure to bring industrial jobs to the Midwest farm communities so kids didn’t need to leave home to survive. That policy reversed in the 70s and 80s, if not intentionally, then driven by tax cuts and smaller government. In 1970, just a young man, I was optimistic, but by 1980, the Midwest was where I’d return after making my fortune in the Northeast, but by 2000, visits convinced me the Midwest had nothing to offer, without paying high prices to “import” what was a normal good in NH, for example, a convenient quality technical college. The Purdue, IU, etc are packed together in UMass, MIT, Harvard, Tufts at roughly the same price. In the 60s, the Midwest wanted to offer a local option, but by the 70s refused to pay the price to get the benefit of their kids not exiting the Midwest.
Who is eager to move to Indiana, downstate Illinois, much of Ohio, like Dayton? If born there, would you stay?
Mark Z
Nov 6 2020 at 9:15pm
First of all, the ‘midwest exodus’ began way back in the 50s when the major rustbelt cities’ populations started to collapse dramatically, well over 20 years before ‘Reaganism.’ Second, I’m pretty sure New England’s growth rate – both demographically and economically – has been below that of the country on average, for many of the same reasons as the midwest (nothing to do with low taxes). It’s also pretty rich to blame the exodus on taxes being too low (did midwestern state taxes actually decline in the 1970s for that matter?) when people are largely moving to states like Texas and Florida that don’t have state income tax.
Mike`
Nov 6 2020 at 3:02pm
This parallels what happened in CA this election, where the Democrat dominated electorate rejected Democrat related policies, while simultaneously voting for Democrats.
Democrats in CA rejected increased property taxes on businesses, rejected affirmative action and voted for the Uber drivers, who are countering AB5, a Democrat based law that outlawed independent contractors (in favor of union membership) with the exceptions of lawyers, doctors, accountants, etc.
Don’t these votes get the connection between the politicians and their political parties and those parties’ policies?
Or do Democrats base their votes not on policies, but on personality or looks or just because there is a D behind their name?
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