During last year’s campaign for governor we took then-Republican incumbent Bruce Rauner to task for a False claim about a tax plan being pushed by Democratic rival J.B. Pritzker.
Pritzker said he wanted to replace Illinois’ flat income tax with graduated rates requiring the wealthy to pay more. Rauner said working families would get soaked because all states with graduated tax systems — 32 at last count — impose higher tax rates on middle-income earners than what they currently pay in Illinois. While there are many examples of graduated tax states that impose higher rates on the middle class than does Illinois, there are also several states that charge less.
Now, Pritzker is the state’s chief executive — and the one painting tax policies in overly broad strokes.
In his first budget address late last month, Pritzker, as expected, talked up graduated taxes — a switch that is politically difficult and would take time to implement because it requires a constitutional amendment.
At the same time, he dismissed quicker-to-achieve revenue raising schemes like broadening the sales tax to include services; eliminating a decades-old exemption from the income tax for retirement income; or raising the current flat-rate income tax. Such actions, he argued, would “fall disproportionately on the working poor and the middle class.”
Is Pritzker’s sweeping assertion on more solid ground than Rauner’s? Just barely.
Taxing more services
The sales tax is considered inherently regressive because everyone, rich, poor or in-between, pays the same rate when they make a retail purchase.
But experts told us that extending the tax to cover an array of services, such as landscaping, hair styling and laundry, could not only bring in more revenue but help make the sales tax less regressive and benefit those with less disposable income by providing a cushion to lower rates overall.
“As income rises, the share of your expenditures that are spent on services generally rises,” said David Merriman, an economist who heads the Fiscal Futures Project at the University of Illinois.
Iowa taxes far more services than Illinois, yet the composite of state and local sales taxes tops out at 7 percent throughout much of our neighboring state and in the largest city, Des Moines, it’s 6 percent. In Wisconsin, which also taxes more services than Illinois, the sales tax tops out at 5.6 percent in Milwaukee. In Chicago, the combined tax rate currently sits at 10.25 percent.
If Illinois taxed the same array of services as neighboring Iowa, it could boost annual revenue by $1.2 billion, according to projections from the Illinois legislature’s bipartisan fiscal forecaster. Following a more modest Wisconsin model would raise an extra $588 million, the forecaster said.
Taxing retirement income
Most states tax income, but Illinois is one of the few that exempts all forms of retirement income — including Social Security, pensions and withdrawals from 401(k) and IRA retirement savings plans. The Illinois comptroller’s office estimated the tax break cost the state $2.3 billion in revenue in 2014 when the income tax rate was close to the current 4.95 percent.
The retirement exemption dates back to 1972 amid concerns of high poverty rates among seniors. Today, less than 10 percent of seniors live in poverty.
Pritzker would be correct about harming the poor and middle class if Illinois simply did away with the retirement income break in its entirety. But that’s not how it’s done by most states.
In general, states that tax retirement income nonetheless shield some of it from taxation. That’s the case in neighboring Indiana and Michigan, which, like Illinois, have flat-rate income taxes. Both states exempt Social Security income, and Michigan also allows thousands of dollars in deductions on pension and annuity benefits.
“You can do it in a way that’s not the least bit regressive,” said Carol Portman, president of the nonpartisan Taxpayers’ Federation of Illinois.
The Center for Tax and Budget Accountability, a liberal-leaning Chicago-based fiscal watchdog, has proposed taxing retirement income but suggests leaving the exemption in place for taxpayers with an adjusted gross income below $50,000. Doing so could still net the state more than $1 billion in additional annual revenue, data from the Illinois Department of Revenue indicate.
Raising the income tax
In his budget speech, Pritzker held out his graduated tax push as the only way to inject more fairness into a tax system currently charging everyone at the same flat rate. But during last year’s primary campaign, Pritzker himself floated a revenue-raising plan to make the single-rate system more progressive that would require legislative approval but no constitutional change.
In essence, it would have hiked the current 4.95 percent flat rate tax but then softened the blow for those of modest means with increased or new exemptions and credits as a temporary measure while Pritzker pushed for a formal graduated tax.
“We can do what other states have done with a flat income tax and that is to put exemptions in place, to raise the overall rate but protect the middle class and those striving to get there with those exemptions,” Pritzker said at a candidate forum in February of 2018.
It’s less than clear what that would look like for Illinois. But Merriman, the University of Illinois economist, said he thinks the state could explore it — especially since Illinois already offers an earned-income tax credit to low-income taxpayers.
“That option is very much under-discussed, in my view, as a possibility,” Merriman said.
Still, the governor’s office maintains Pritzker’s graduated-tax plan is the only way forward.
“The governor proposed a realistic plan to serve as a bridge to the future, with the ultimate goal of a fair tax system that will transform state finances in a momentous way without burdening the middle class,” spokeswoman Jordan Abudayyeh wrote in an email. “The alternative to this plan is doing more of the same: namely, raising taxes on the middle class.”
Pritzker said that raising revenue for cash-strapped Illinois by taxing more services, taxing retirement income and increasing the state’s current flat-rate income tax would “fall disproportionately on the working poor and the middle class.”
Those are indeed possibilities, but examples from some other states show they don’t have to be realities.
There are states with broader, less regressive sales taxes. There are flat tax states that tax retirement income without burdening the poor and middle class. And, as Pritzker himself once pointed out, there may even be ways to wring more revenue from a flat tax system without harming taxpayers of more modest means.
We rate his claim Mostly False.
MOSTLY FALSE – The statement contains an element of truth but ignores critical facts that would give a different impression.
Click here for more on the six PolitiFact ratings and how we select facts to check.