Flat tax: 'Subsidy for wealthiest Illinoisans'

Study backs Fair Tax Amendment, says current tax system worsens income inequality, ‘wealth gap’

A new study suggests that the flat tax rate in Illinois basically subsidizes the very wealthy, making income inequality worse. (Shutterstock)

By Ted Cox

A new study provides a scathing analysis of the state’s current flat income tax, charging it “amounts to a tax subsidy for the wealthiest Illinoisans that compounds income inequality and racial wealth gaps.”

“Taxes are about more than taxes,” said Lisa Christensen Gee, who wrote the study for the Institute on Taxation and Economic Policy, a national nonprofit, nonpartisan think tank that works on state and federal tax policy. “In choosing more regressive tax systems, more of the load or responsibility of the tax falls on moderate- and lower-income taxpayers, which effectively subsidizes the taxes the wealthiest pay under a progressive tax system.”

Currently, Illinois has a flat tax rate of 4.95 percent, the same paid by everyone on their income taxes. Opponents of what Gov. Pritzker has called the “fair tax” — raising the tax rate on just those making more than $250,000 a year — have asked what could be more fair than everyone paying the same percentage of income. Yet as Pritzker has pointed out — and the study backs it up — basic sustenance costs the same for everyone, but as income rises that gives the wealthy a larger share of discretionary income. That’s especially true with the proliferation of local taxes — not just property taxes, but even more regressive taxes and fees on utilities, cellphones, streaming services, and countless other items.

The study, titled “Illinois’s Flat Tax Exacerbates Income Inequality and Racial Wealth Gaps,” was released Thursday. It states up front: “Tax laws that collect higher shares of taxpayer income from those with lower incomes exacerbate income inequality. In Illinois today, after state and local taxes, a family making less than $21,800 has 85.3 percent of their income remaining post-taxes while a family with more than $537,400 has 92.6 percent of theirs. Tax laws that perpetuate these inequities year after year make it even harder for families already struggling to get by with low, stagnating wages.”

“One of the benefits of having a more progressive tax system in place,” Gee said, “is it can help ease up on some of the more regressive taxes, like sales taxes and property taxes. That helps with the rebalancing of the tax equity and impact, especially on lower-income and moderate-income taxpayers.”

The study basically makes its points by looking backward, comparing what the Illinois tax system would have looked like over the past 20 years by comparing the flat tax with the rates set by the General Assembly last year in passing the fair tax: rates drop to 4.75 percent for those making up to $10,000, drop slightly to 4.9 percent for those making up to $100,000, and remain the same 4.95 percent for those making up to $250,000. After that, the tax brackets are set at 7.75 percent up to $500,000, 7.85 percent up to $1 million, and the top rate of 7.99 percent for those making more than $1 million a year.

The Pritzker administration has insisted taxes would remain the same or lower for 97 percent of Illinoisans. The study adds that even those paying the same rate would see their taxes drop as a share of their overall income.

“The choice between maintaining the flat-tax status quo or adopting the fair tax extends beyond questions of individual income tax liability and improved tax equity,” the study states. “It also affects income inequality and racial wealth gaps.”

Gee points to the current nationwide concentration on racial inequities and the “greater collective consciousness about the way racial injustice plays out.”

The study confirms that in no uncertain terms, projecting that “Black and Hispanic Illinois taxpayers with taxable incomes less than $250,000 pay $4 billion more in taxes over the 20-year period studied under a flat tax than they would under the fair tax. These tax differences reduced the standard of living for these families and exacerbated income and wealth gaps, while enabling the wealthiest Illinoisans to accumulate an additional $7.5 billion in wealth due to these tax subsidies.”

“When we look at current-day poverty in communities of color, we must understand the role of our tax policies in creating that reality,” said Amisha Patel, executive director of Grassroots Collaborative and Grassroots Illinois Action, in response to the study. “Because of the flat state income tax, Black and Latinx workers have effectively subsidized the wealth of rich white residents. We have the power to end this gross inequity by voting Yes for Fair Tax this election, ensuring that our communities have greater access to quality schools, social services, and more.”

And what did the wealthy do with their additional disposable income? In many cases they reinvested it, and those earnings only increase income inequality.

Gee blames the prevailing neoliberal tax policy to “incentivize capital investment and job creation and this notion that a rising tide will float all boats, and the fact of the matter is that does not pan out and it’s just not true.” Since the tax cuts passed under the Reagan administration — culminating in the $1 trillion tax cut delivered to the very rich by President Trump and congressional Republicans at the end of 2017 — income inequality has only gotten worse across the nation. “In picking and choosing what components of classic economic theory are adhered to, there is a lot of self-serving interests that happen,” Gee added. “It’s also not true to the core stories we tell about who we are and how our economy operates — being the land of broad opportunity where anybody can make it.”

Citadel’s Kenneth Griffin contributed $20 million to an organization fighting the Fair Tax Amendment — perhaps because under the proposed progressive income tax he would have paid $26 million more in taxes in 2018. (Wikimedia Commons/Paul Elledge)

Exhibit A would be Kenneth Griffin, the billionaire head of the Citadel hedge fund who recently contributed $20 million to a group committed to fight passage of the Fair Tax Amendment. Former state Sen. Daniel Biss was quick to point out that, under the progressive income tax proposed by Pritzker, he would have paid $26 million more in taxes in 2018. Gee laughed at that, saying, “Up to that point he has the economic incentive to do so, to try to stop it.”

She said, “It’s not surprising. A lot of that is around who are the individuals with interests and what do they stand to lose? … As humans, we’re loss-averse — the feeling of things being taken from us. This is actually something in the long term that will make us all better off, even if there’s some short-term pain to those who benefit more at the moment.”

Because a graduated income tax has to amend the state constitution, which currently calls for a flat tax, Illinois voters have to approve it by a supermajority of 60 percent. “It’s not uncommon,” Gee said. “Tax issues on the ballot are always a challenge.” Polls have shown overwhelming support for a progressive income tax, but of course subject to a lot of muddying of the waters and misinformation from anti-tax groups like the one Griffin contributed to.

“Illiniosans have an opportunity, in one realm of the universe, to say we can do something that will allow us to build a more a more equitable society,” Gee said. The irony, the study points out, is that even under the fair tax Illinois would only go from being the eighth-most-regressive state in its tax system to the 20th-most-regressive state.

Legislators wanted to keep the top tax rate under those of other Midwestern states with graduated income taxes, like Iowa and Minnesota, but Gee said that could easily be raised — and appropriately so. The added $3 billion in revenue to be produced by the graduated income tax could also fund other reforms, she added, such as expanding the Earned Income Tax Credit both in its tax refunds and its reach of eligibility.

“The data in this report prove what many families of color and low-income Illinois families have felt for years — Illinois’s tax system was built to benefit the rich at the expense of everyone else,”said Harish Patel, Director of Economic Security for Illinois. “If we in Illinois intend to close the racial wealth gap and give all our neighbors a fair shot, we must start by creating a fairer tax system.”

“This is a good first step, but there’s a lot more the state can do,” Gee said. “This is a good first step in a better direction.”