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A graduated income tax -- a bad idea, even for its proponents

In Illinois, the possibility of a graduated income tax has been held out as the solution to the state's fiscal woes. Not only is a graduated income tax a bad idea for the state, it has virtually no chance of being approved. But it will likely delay the consideration of needed changes.

Illinois faces a daunting fiscal challenge. In addition to underfunded state pensions, the state must confront a long-term structural deficit where the growth of expected spending will outpace future revenues unless corrective action is taken. A reduction in the temporary individual income tax rate in January 2015 from 5 percent to 3.75 percent will make the problem worse.

Some combination of spending discipline and additional revenues is needed to address the state's budget problems. One solution being put forward by a number of Democrats in the General Assembly, union groups and advocates for the poor is to replace the existing flat rate income tax with a progressive one. They suggest that this would almost magically produce enough revenue to deal with the state's fiscal woes while expanding needed state services. At the same time, the graduated tax would be "fairer," providing a tax cut for 80 percent of taxpayers.

Unfortunately, the consideration of a graduated income tax may be more of an impediment to addressing the state's problems than a solution. First, a steeply progressive income tax in Illinois would create some major problems. State tax bases are becoming increasingly mobile. Taxpayers can respond in a variety of ways to avoid higher marginal rates. Illinois now has the 49th-highest unemployment rate in the country, exceeded only by Nevada. The legacy of unfunded state liabilities along with the prospect of higher marginal tax rates for investors and entrepreneurs will clearly have negative consequences.

A graduated income tax would also increase the cyclical variations in tax receipts. Over the last 20 years, the state has proven itself inept in managing the increasingly volatile nature of tax revenues. The 1990s and the 2000s saw rapid increases in tax receipts, followed by precipitous declines in revenues that had disastrous impacts on the state budget. A more progressive structure with graduated rates would sharply increase the peaks and valleys of state revenues, aggravating an already serious problem.

Fortunately, it is extremely unlikely that a graduated tax will be imposed in Illinois. Since non-graduated rates are mandated by the state constitution, the constitution would have to be amended to permit such taxes and then the General Assembly would have to enact an actual tax. To amend the constitution, both the Illinois House and Senate must approve by a three-fifths majority putting the question on the ballot for an upcoming general election. Then the proposed change must be approved by three-fifths of those voting on the amendment or a majority of those voting in the election. Even with the large Democratic majorities in both Houses, it is extremely unlikely that the proposed amendment will ever reach the voters. Furthermore, approval of amendments by the voters is rare. It is quite likely that voters would view this as a tax increase rather than a restructuring.

Despite the low probability of enactment, the elusive prospect of a graduated tax has become an impediment for the consideration of more modest but achievable tax changes that are needed, such as broadening the bases of the income tax and sales tax while avoiding the loss of revenue when the tax rates fall as scheduled in a little over a year.

Such inaction may harm the very people the liberal proponents of a graduated tax say they are fighting for. Harsh budget cuts will impact the poor and disadvantaged who are the primary beneficiaries of state programs far more than they would benefit from a graduated rate structure.

Economist J. Fred Giertz is on the faculty of the University of Illinois' Institute of Government and Public Affairs. He can be reached at 217-244-4822 or