Illinois voters in November will be deciding on an issue that will impact both the state’s financial future and their own pocketbooks: an amendment to the state Constitution that would replace Illinois’s flat-rate income tax with a graduated-rate structure.
Why change the way income is taxed? And how would the new rate affect what residents end up paying?
Here is your one-stop guide to the proposed amendment: Where it came from, how it’s proposed to work and who will ultimately be affected.
What’s a graduated-rate income tax?
Illinois now has a constitutionally mandated flat-rate tax that taxes all personal income at the same rate of 4.95%.
Under a graduated-rate income tax, different levels of wages are taxed at different rates. Proponents say higher income taxpayers should bear a greater tax burden than lower income taxpayers. Opponents say a graduated tax hurts business owners and job creators and makes them the target of future tax hikes. Raising taxes across the board under a flat tax is more difficult to do, they say.
How does a graduated rate tax work?
When a state imposes a graduated income tax, it separates the pay scale into a number of fixed income brackets and determines a different tax rate for each bracket, called a marginal rate.
These brackets apply to every individual taxpayer’s income — the first bracket of your income will be taxed at the lowest rate, the second bracket at the second lowest rate, and so on. Ultimately, one’s average tax rate will be lower than their final marginal rate.
Do any other states do this?
Thirty-two states and the District of Columbia impose graduated-rate income taxes. The federal government also uses a graduated rate structure to determine federal income tax.
Illinois is one of nine states that still imposes a flat income tax, along with Indiana and Michigan.
What are the brackets and rates?
Under tax rates approved by the General Assembly, the tax rate would drop to 4.75% for the first $10,000 of income for single and joint filers. Income between $10,000 and $100,000 would be taxed at 4.9%, and the rate would remain at 4.95% for income between $100,000 and $250,000.
From there, single filers would be 7.75% for income between $250,000 and $350,000, and 7.85% for income between $350,000 and $750,000. Joint filers would be taxed at 7.75% on income between $250,000 and $500,000, and 7.85% on income between $500,000 and $1 million.
After that, all income for single filers that make over $750,000 or joint filers that make over $1 million annually will be taxed at 7.99%.
The governor also proposes increasing the current property tax credit by 1 percentage point, from 5% to 6%. He would create a per-child tax credit of up to $100 for individuals earning less than $80,000 and joint filers earning less than $100,000.
The corporate tax rate would increase from the current 7% to a flat rate of 7.99%, matching the top personal rate.
How will this impact what I pay?
Under the rates approved by legislators in 2019, Pritzker’s proposed graduated income tax plan would lower the average tax rate for all taxpayers earning less than $250,000 annually, which amounts to 97% of Illinois wage earners.
The 3% of Illinois residents who earn over $250,000 annually will pay more in taxes under Pritzker’s proposed plan.
Of the 3% who would see higher tax rates under Pritzker’s plan, 85% live in Cook County and the five collar counties, which are home to about two-thirds of the state’s population.
Why change our taxes in the first place?
Illinois has long faced financial problems under Republicans and Democrats and the economic woes have only been exacerbated by actions to deal with the coronavirus pandemic. The state started the budget year with a $3.4 billion deficit, $8.5 billion in unpaid bills and an unfunded public employee pension liability of $137.2 billion.
Pritzker has said the state’s tax system is structurally inadequate to meet required spending. His plan is the graduated rate tax, which would raise about $1.4 billion for the rest of the current budget year and $3.4 billion over a full 12 months.
Pritzker, a billionaire heir of the Hyatt hotel fortune, is spending $56.5 million of his own money to back what he calls a “Fair Tax,” contending “it’s wrong that I would pay the same tax rate as someone earning $100,000 or, even worse, pay the same tax rate as someone earning $30,000.”
What will Pritzker do if the amendment doesn’t pass?
If the graduated-rate income tax does not pass in November, Pritzker’s proposed options include cutting state spending on education, public safety and social services by 15% or raising the flat tax rate to 5.95% for Illinois taxpayers.
What’s the argument from opponents of the amendment?
Republicans and pro-business groups are fighting the proposal, which they contend will make it easier for lawmakers to raise rates, with middle-class taxpayers eventually also getting taxed at high rates.
What role does COVID-19 play in this issue?
State spending on COVID-19 relief has deepened Illinois’s preexisting budget strain. Pritzker projected a $2.7 billion shortfall for the budget year that ended on June 30 with a $6.2 billion hole for the new budget year that began July 1.
At an April news conference, the governor stressed that the Illinois Fair Tax is “needed now more than ever” to alleviate the working and middle classes, provide public services and deal with new budget hits throughout the continued pandemic.
Opponents to the amendment say the economic devastation wrought by the pandemic makes it the wrong time to move ahead on a major tax change. The state budget shortfall raises the potential that graduated rates would be raised, or income brackets lowered, to collect more money through a graduated rate tax. According to Jason Heffley, executive director of Ideas Illinois, which opposes the change. “Taxes are already too high in Illinois and now is the worst time to push a massive tax hike when small businesses and working families are hurting.”
When and how would this graduated rate income tax take effect?
Since the Illinois Constitution mandates a flat-rate income tax, the Pritzker administration must pass a constitutional amendment to impose a graduated-rate income tax.
Last year, the General Assembly agreed to put a proposed constitutional amendment before voters as a referendum question in the general election on Nov. 3 that would remove the state’s flat-rate tax requirement.
In order for Pritzker’s tax reform to go into effect, the amendment requires approval by 60% of those who vote on the issue, or a simple majority of the total votes cast, in the November 2020 election.
If the amendment is approved, the new graduated-rate tax structure passed by legislature will take effect on January 1.
How do I vote on the tax amendment?
If you’re registered to vote in Illinois, the amendment will be on your ballot for the Nov. 3 general election. You can vote in-person at your local precinct or by mail-in ballot.
If you are a U.S. citizen, will be 18 by Election Day and have been a resident of Illinois for at least 30 days before Nov. 3, you can register to vote in Illinois.
Check your registration or register to vote online here.
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