Recently, as he discussed a potential candidacy for mayor of Chicago, Ald. Ricardo Munoz floated the idea of instituting a city income tax for residents earning more than $120,000 a year.
“If you make more than $120,000 a year," Munoz told Fox 32's Mike Flannery, "you're not gonna like my plan."
Meanwhile, JB Pritzker is campaigning for Illinois governor on a graduated state income tax (one with higher rates for higher earners). Currently, Illinois charges all residents, from billionaire investor Ken Griffin on down to the Tamale Guy, the same 4.95 percent.
Illinois has one of the most regressive tax systems in the nation — and politicians are taking notice. Under our system, the burden of taxation falls disproportionately on those least able to pay it. According to the Institute on Taxation and Economic Policy, Illinois is one of the “Terrible Ten Most Regressive State & Local Tax Systems,” clocking in at fifth worst in the country. The poorest 20 percent of Illinoisans pay 13.2 percent of their income in taxes. The wealthiest 1 percent pay only 4.6 percent.
The cause is the flat tax. Of the 43 states with an income tax, 34 use a graduated scale. New Jersey, which usually manages to be in less financial trouble than Illinois, goes from 1.4% for the broke to 8.97% for millionaires. Only three states — New Hampshire, North Carolina, and Utah — levy a higher flat rate than Illinois.
A flat income tax is enshrined in Illinois’s constitution. And when that constitution was written, in 1970, the flat tax made sense. The nation was still enjoying its industrial heyday, with a broad middle class and shared prosperity.
But shortly thereafter, the United States entered a period economists have called the Great Divergence. Wage gains failed to keep pace with productivity, and more money became concentrated in fewer hands. Our Gini coefficient, a measure of economic inequality in which 0 is everyone earning the same and 100 is one person owning all the money, has climbed from 35 to 45 — higher than any European nation.
In fact, Illinois's flat tax may be one reason the state is so broke. According to a 2012 study by the State Budget Crisis Task Force, our tax rate has kept Illinois from capturing the proceeds of all that income flowing to the top of the pyramid:
“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.
Gov. Bruce Rauner, you'll be unsurprised to learn, is no fan of the graduated tax. In an interview with WJBC radio in Bloomington-Normal, Rauner argued that “[in] every state that has put in a graduated income tax, the middle class always pays more.” (The Better Government Associated looked into the claim, and judged it false.)
Alderman Munoz, for his part, didn’t go into detail about his proposed city tax. But one could imagine it replacing Chicago's 1.25 percent city sales tax, which combines with state and county taxes to make Chicago's 10.25 percent sales tax the highest in the nation. (Sales taxes, by the way, are also regressive, since the poor spend a larger proportion of their earnings on them than the wealthy. The poorest 20 percent of Americans pay 10.9 percent of their earnings in sales tax, while the top 1 percent pays only 5.4 percent.
Changing Illinois’s tax system won’t be easy. Instituting a progressive state income tax would require a constitutional amendment, which has to be passed by 60 percent of the General Assembly, then submitted to the voters. Further complicating things, Illinois currently bans cities from levying income taxes, so the General Assembly would also have to overturn that prohibition for Munoz's plan to work.
The governor can't pass a constitutional amendment, and the mayor of Chicago has no role in passing a state law. But both have the bully pulpits of their offices, and together, they could use them to argue for bringing Illinois’s antiquated tax system into the 21st Century.