STUMP » Articles » Illinois Finance: Gov. Pritzker's Tax Proposal » 8 March 2019, 12:21

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Illinois Finance: Gov. Pritzker's Tax Proposal  

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8 March 2019, 12:21

I’m not waiting til Tuesday to cover this, because this is insane.

PRITZKER’S PLAN

Here it is: Millionaires Would Pay 3 Percent More Under Pritzker Tax Plan

Want to know what you would be paying under Gov. J.B. Pritzker’s graduated income tax proposal? The governor released the specifics of his plan Thursday, and, as advertised, it would hit high earners the hardest.

Illinoisans who earn $1,000,000 and up will have to get used to paying 3 percent more of their income in state income taxes under the governor’s just-released proposal – though Pritzker cautions this is his opening plan and negotiations are underway with the General Assembly for a final plan. The current rate is a flat 4.95 percent for everyone, so 97 percent of earners, according to the governor, would actually see a slight cut in their state income taxes.

The governor’s proposed tax rates are as follows:

• 4.75 percent for those making $0-10,000 in income

• 4.90 percent for those making $10,001-$100,000

• 4.95 percent for those making $100,001-$250,000

• 7.75 percent for those making $250,001-$500,000

• 7.85 percent for those making $500,001-$1,000,000

• 7.95 percent for those making over $1,000,000

In addition, the corporate rate would rise from 7 to 7.95 percent.

Oh, and it’s more insane than you think.

MILLIONAIRES TO BE PUSHED OVER CLIFF

This is the actual presentation from Pritzker, and I want you to look at slide #5:

I want you to think of the result of such an idiotic approach. There is a reason that when one has progressive tax rates like this, you have each bracket imposed in a marginal way (meaning, the higher tax is applied only to the portion of the income in that bracket.

So this is what the effective taxes by income level looks like under Pritzker’s proposal (from last slide in presentation):

That is the effective tax rate. Here is the graph where it shows dollar amounts.

I want you to think the difference of someone with $1,000,000 income and someone with 1,000,001 in income.

$1,000,000: $70,935
$1,000,001: $79,500

The difference in taxes for that last dollar is $8,565.

That’s equivalent to an 856,500% marginal tax on one additional dollar of income.

I will make an extremely simple prediction: there will be nobody making $1 million or anywhere near $1 million under such a regime. Somebody with a $30 million payday? Sure. No problem. But anybody currently near that cliff will rapidly get pushed away from that cliff. You’re that high in income, there are other options for compensation that doesn’t get hit by income tax.

INNUMERATE REPORTING ON TAX RATES

I have written about this several times… usually, when taxes are increased, the focus is on the percentage point change in the tax rates… as opposed to the percentage change on the taxes to be paid, which is going to be a much larger result.

Pritzker is proposing a 3 percentage point increase in taxes on these millionaires. That’s off a current 4.95% rate.

3 percentage points sounds small.

It’s an over 60% increase in taxes. That’s a huge increase. You think the millionaires would just sit there and take it? That’s a lot of money.

AMENDING THE ILLINOIS CONSTITUTION

As it stands, Illinois can’t impose such a tax regime. It requires the state constitution to be amended.

How rapidly can that happen?

Ballotpedia: Amending Illinois Constitution

Article XIV of the Illinois Constitution lays out four different routes that can be taken in order to change the constitution over time:

A constitutional convention can be held if 60 percent of the members of both houses of the Illinois General Assembly vote to place a constitutional convention question on the ballot and voters approve it.

Every 20 years, the question of whether to hold a convention is automatically referred to a statewide ballot.

A legislatively referred constitutional amendment can be proposed if 60 percent of the members of both houses of the Illinois General Assembly vote to put it on the ballot, with some constraints which include:
- The legislature can only propose to amend up to three articles of the constitution in any one election.
- The legislature is not allowed to propose any amendments when a constitutional convention has been called up through the time that an election is held on any proposed amendments or revisions that arise from that convention.

An initiated constitutional amendment can be proposed but only under certain conditions, which include the following:
-An initiated constitutional amendment can only apply to “structural and procedural subjects” contained in Article IV of the Illinois Constitution.
-Signatures equal to 8 percent of the total votes cast for governor in the most recent gubernatorial election must be collected.

Any statewide ballot question concerning a constitutional convention, ratifying an amendment proposed by the Illinois General Assembly or adopting an initiated constitutional amendment must be approved by a supermajority vote of 60 percent of those voting on the question or a majority vote of those who cast a ballot for any office in the election.

The last time there was a constitutional convention for Illinois was 2008, and many people want to shy away from a constitutional convention, as more than just progressive taxation could come out of it.

The 1970 constitution brought significant changes to Illinois, including home rule powers; the amendatory veto for the governor; prohibiting reductions in pension benefits for state employees; and saying the state should shoulder the primary funding responsibility for K-12 education (we’re still waiting for that to happen).

A few issues that likely would be discussed at a new one: Going from a flat to a graduated income tax; pension reform; term limits; and how legislative maps are drawn.

We’re not ready to say it’s time for another constitutional convention. There is precedent and a certain charm in voting on one in the year Illinois turns 200, but more than symbolism must be considered before undertaking an effort as massive as altering the document that rules how Illinois is governed.

So, Pritzker would probably want the route where the specific article is targeted. That requires the legislature to pass it by 60%.

The current partisan breakout:

Senate: 40 Democrats out of 59 seats. That’s 68%.
House: 74 Democrats out of 118 seats. That’s 63%.

So if Pritzker can convince Democrats to go with this, they can put it on the ballot. It may be a heavy lift for some of those Democrats, though. I bet some of them have some rather high income constituents who may not be happy with any of this.

The issue is: will they be able to get 60% of Illinois voters to vote for this? (or that weird aspect of 50% of those voting for any office… hmm.) Only about 55% voted for Pritzker. And I can imagine more people will be motivated to vote against allowing a progressive tax (because the brackets would eventually be applied at lower levels) than for one. But I could be wrong.

It may work. But the point is it would have to get through the legislature, and then past the Illinois voters.

FUTILE AND OFFENSIVE GESTURE

This is what Mark Glennon of Wirepoints has to say: Busted: Pritzker’s Mythical Revenue Panacea Fully Exposed

Assume he is correct that his new tax rates will raise $3.4 billion more for the state. That’s all you need to see that that his central promise to Illinois has been a hoax. Contrary to his persistent claims that a progressive income tax is Illinois’ ticket to salvation, $3.4 billion isn’t remotely close to solving Illinois’ fiscal crisis, much less funding all the other promises he has made.

To put $3.4 billion in perspective, Illinois could put that entire amount into pensions only and it still wouldn’t be enough to meet what’s needed yearly. The true cost is about $4.7 billion more per year than the roughly $7 billion Pritzker’s budget proposes for pensions. That’s based on the “actuarially determined contributions” contained in the most recent actuarial reports, and they’re based on assumptions widely regarded as far too optimistic.

The proposal is absurd. It’s got stupid imposition of the rates, and really, taxes should be raised on all Illinoisians if you really want to plug the holes in the Illinois budget.

Yes, I understand it’s a heavy lift to increase taxes across the board, but maybe if it were tied to, say, a state constitutional amendment allowing for the cutting of pensions, if only of COLAs, along with some other reduction in state spending, perhaps people could live with that.

It’s just a crazy thought.

Jane the Actuary says this: Pritzker’s tax plan: now we know

In the first place, the incessant promises of “tax cuts for the middle class” may be literally true insofar as 4.90% is 0.05 percentage-points less than 4.95%. But these trivially-reduced rates demonstrate more than anything else the foolishness of having promised a “middle class tax cut” in the first place. It would have been far better for Pritzker to have acknowledged this (and better still not to have promised it); to hold to his campaign promise in this manner treats Illinoisians as fools, really. It also feels a bit like the game of pricing ending in .99, what with these brackets that are basically 5% and 8% but rely on residents thinking of 4.95% and 7.95% as meaningfully less than that, and having the multiple brackets with nearly identical tax rates makes no sense either.

It does, indeed. Read the whole thing, as Jane the Actuary questions whether Pritzker and his policy people can even do math.

ENJOY YOUR MESS, ILLINOIS

That Illinoisians were such suckers to believe such a foolish promise reminds me of the Simpsons episode Trash of the Titans:

Homer’s campaign [for Sanitation Commissioner] starts badly with him being beaten up after interrupting U2’s PopMart Tour concert, but picks up when he thinks of a slogan: “Can’t someone else do it?” Homer spreads his message to the town and promises expensive services such as round-the-clock garbage service and sanitation workers doing all possible cleaning, leading to his landslide victory in the election. After being sworn in, he shows his plans by singing a parody of “The Candy Man” entitled “The Garbage Man”.

However, fulfilling these promises proves costly and Mayor Quimby denounces Homer for spending the department’s yearly budget in only a month. Homer gets cities all over the United States to pay him to store their excess garbage into an abandoned mine shaft on the outskirts of Springfield. Despite the budget crisis having ended and the workers receiving their salaries as promised, the garbage builds up underground and eventually erupts, pouring trash all over the town. At a town hall meeting, Homer is fired from his post and replaced with Ray Patterson, who declines reinstatement. With no other options left, Quimby moves the entire town five miles down the road.

My favorite part of the episode:

Ray Patterson: Oh gosh. You know, I’m not much on speeches, but it’s so gratifying to… leave you wallowing in the mess you’ve made. You’re screwed, thank you, bye.

Moe: He’s right. He ain’t much on speeches.

Rauner failed at trying to fix Illinois finances, a big part of which involved a recalcitrant Illinois legislature.

But the people of Illinois have essentially done it to themselves.

Don’t be expecting a federal bailout, either – you will wallow in the mess you made. That Pritzker got elected on such blatant lies is on the 54.5% of voters who voted for him, and continuing to return a heavily-profligate legislature is on you as well.

Here, maybe you can ask Marie Kondo to help:

via GIPHY

Here’s another option: bankruptcy

via GIPHY

Oh wait, states can’t go bankrupt (though they can default.)

OPINION ON PRITZKER PROPOSAL

Editorial: Gov. Pritzker’s $3.4 billion tax hike: How to fan the ‘Illinois Exodus’

Tax policy drives behavior. It’s why states with low or no income taxes are thriving. Illinois needs to be adding more taxpayers and businesses, not subtracting them. When politicians raise taxes, they aren’t adding. A switch to a graduated tax would eliminate one of Illinois’ only fishing lures to attract taxpayers and jobs: its constitutionally protected flat income tax.

Rates under Pritzker’s plan would jump to nearly 8 percent for anyone earning more than $250,000 per year. For filers who report income of more than $1 million annually, the 7.95 percent rate would not be marginalized; meaning, it would be applied to every dollar, not just income of more than $1 million. Line up the Allied moving vans for business owners and other high-income families who’ve had a bellyful of one of America’s highest state and local tax burdens: exorbitant property taxes, plus high sales taxes, plus fast-rising income taxes.

Pritzker’s only pro-growth selling point Thursday for moving to a graduated structure is that it would bring stability to Illinois’ roller-coaster budget environment. That’s what he said. But it would not bring stability. Unlocking the state constitution to permit graduated rates would allow lawmakers to tinker with tax rates into perpetuity. After a moment of stability — that is, a quick honeymoon for taxpayers at the rates he now proposes — which direction do you think your income tax rate would head?

Op-Ed: Progressively worse: Pritzker’s tax push has a dangerous precedent

Only one state has adopted a progressive income tax in the past 30 years: Connecticut. The Nutmeg State switched away from a flat income tax in 1996, phasing in the progressive tax over three years. Politicians there made all the same promises that some Illinois politicians, including Pritzker, are making today.

First, they said the middle class would see a tax cut. Second, they said a progressive tax would ease the property tax burden. Third, they said it would stabilize state finances. And finally, they said it would help the poor and disadvantaged.

The results are in.

The typical Connecticut household has seen a 13 percent hike in their income tax rates since 1999, when the progressive income tax was fully phased in. Property taxes as a share of income are up more than 35 percent. The state has faced a budget deficit in 12 of the past 15 years. And Connecticut saw a 47 percent jump in the poverty rate while the rest of the nation saw a dip.

Mind you, here is the CT poverty rate is one of the states with the lowest poverty rates, so the rate must have been really low before this. I checked the research, and yes, there was a big bump up from 2007 to 2008. That study goes up to only 2013, but it really has been a bad trend for Connecticut. I guess that can happen when you’ve got a state so dependent on the financial industry… and finance people get fed up with the level of taxation and leave.

Other items on this:

TWEETS ON THE PRITZKER PROPOSAL







Well, obviously a Republican in Illinois won’t vote for this.



Oh jeez, I didn’t even look at that part.




Best wishes, Illinois.


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