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Policy: Do We Need a Graduated Tax?

Illinois has its best chance in 25 years to get a progressive income tax--if it's not oversold.

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In the past several months Jan Flapan has learned more than she ever wanted to know about unpaid bills. "It's not just the Chicago schools. There are 84 small [Illinois] school districts in worse financial shape than Chicago. There are 10,000 people waiting for help with substance abuse. There are more than 14,000 waiting for mental health care. There's $30 million in federal job-training funds that didn't come to Illinois last year because the state didn't appropriate the matching funds. I was reading in the paper this morning about the Department of Children and Family Services not keeping its promises to the judge--well, they can't without more money. State public universities have raised tuition 400 percent to make up for reduced state support, making college less accessible.

"The state owes its employees' [and the teachers'] pension funds $13 billion. All these early-retirement programs make that obligation larger. And we started out this fiscal year owing over a billion dollars in current bills.... Our tax structure is not working."

One reason it's not working, she says, is that the state taxes where the money isn't. An Illinois couple with an income of $10,000 owe no federal income tax, but must pay the state of Illinois the same 3 percent of their income as a couple earning $250,000. (The state personal exemption of $ 1,000 did shelter the working poor to some extent when it was enacted in 1969, but now it's worth only about a quarter of what it was then.) During the 1980s, when economic growth took the form of the rich getting richer, that flat 3 percent income tax rate didn't tap the growth the way it needed to.

Efficiency and fairness are often at odds. (Do you stop the train for the latecomer chasing it?) But it takes real genius to devise a state tax system that combines inefficiency and injustice. According to Progress Illinois, a new coalition of more than 70 groups that Flapan cochairs, "A graduated income tax is the solution."

Instead of everybody paying 3 percent of income, those with higher incomes would pay a higher percentage. Exactly how much higher would be up to state lawmakers: in the example the coalition uses, households earning over $75,000 would pay 5 percent and those over $ 100,000 would pay 7 percent. The vast majority--92 percent of Illinois taxpayers--would pay no more than they do now.

Income tax relief for the working poor, and no tax hike for the middle class, and money for social services, and no more unpaid state bills! It sounds too good to be true. It is.

Efficiency first: Illinois does suffer from what University of Illinois at Chicago economist Therese McGuire calls a "structural deficit." Even with no changes in existing laws, current state expenses are growing faster than current state revenues. Two of the biggest culprits are medicaid, a federal mandate, and corrections, a political untouchable.

Pols try to ignore the structural deficit, leading to much of the chronic foolishness in Springfield. "Again and again," Sam Ackerman of the Independent Voters of Illinois-Independent Precinct Organization (IVI-IPO) told a legislative committee last November, "the governor and members of the General Assembly have [waited for] the most dire sort of fiscal crisis--one which can no longer be hidden by budget gimmicks, pension borrowing, and delayed payments--and only then have responded with increases in revenue which are too little, too late, often temporary, and never in an election year. Once this is done most relax in the illusion that the state's financial problem has been resolved, even though many already know that it has not."

But as McGuire's downstate colleague, University of Illinois economist Fred Giertz, points out, the same thing can be said of any reasonable graduated income tax as well: "The pressure on expenditures is greater even than a highly progressive tax could keep up with." The structural deficit is too big a hole for any single plug. McGuire has suggested broadening the state sales tax to include services (another way for the state to get its cut from a growing part of the economy). Others would insist on controlling or even reducing state spending. In any case, the idea that the state's money problems can be solved by taxing somebody else--Progress Illinois' implicit something-for-nothing appeal--is false.

The advocates' own arithmetic makes this clear. Progress Illinois says that its 3-5-7 example of a progressive income tax would raise an additional $ 1.1 billion. But that would only be enough to catch up with current unpaid bills, with no porridge left for the nursing homes and universities and abused kids and dopers looking for treatment. Flapan says, "We aren't denying that something has to be done about spending too," but the organizations that have joined the Progress Illinois coalition agree only on the single focus of their campaign.

Fairness next: Of the 41 states with income taxes, 34 have graduated rates; of all the states, only Kentucky, Ohio, and Pennsylvania tax people with lower incomes than those taxed in Illinois. Illinois' tax system is clearly more unfair than most other states. The poor pay too much and the rich not enough. But merely raising tax rates on the rich--the Progress Illinois proposal--will not do the working poor much good. They need either a lower rate or a much higher personal exemption.

In recent years, progressives (led by the American Federation of State, County, and Municipal Employees) focused not on amending the constitution but on simply increasing the $ 1,000 exemption (the quickest way to fairness if you can come up with some source to replace the lost revenue). Progress Illinois' 3-5-7 example does allow for a doubling of that exemption, which would help a bit, but it's not a high-profile part of their educational campaign. Nor is there any guarantee that lawmakers would include it when they enact a graduated income tax.

The commonest argument against a progressive income tax--that it would put Illinois at a competitive disadvantage with other states, or otherwise cramp economic growth--is weak. McGuire points out that most states with graduated income taxes have top brackets in the 5 to 8 percent range. It appears Illinois could rely on a more progressive tax, she wrote last fall in Illinois Issues, "without getting out of line with its neighboring states."

Progress Illinois is less in danger from conservative counterarguments than from its own promises. A progressive income tax would bring in more money--but not enough. It would be more fair--but not all by itself. Still, the coalition may have to overpromise in order to hold together progressives who want more fairness (Illinois Public Action, IVI-IPO), good-government types who want a more responsive tax system so the state can pay its bills (League of Women Voters), and public employees who want more state spending in their bailiwicks (AFLCIO, University Professionals of Illinois, AFSCME).

Public opinion--in the absence of much public debate so far--seems to be on the coalition's side. According to Ellen Dran of Northern Illinois University's Center for Governmental Studies, 52 percent of Illinoisans randomly polled last fall supported a graduated state income tax and 45 percent opposed it. The poll had a 3.5 percent margin of error, but Dran says the difference is statistically significant.

Translating this narrow approval into law will be far from easy, because of the income tax's peculiar history in Illinois. The state got its first income tax ever just 25 years ago, in a multiyear fight waged across all three branches of government and a constitutional convention. The 1970 constitution compromised between those who wanted no income tax at all and those who preferred a progressive tax by authorizing a flat-rate tax on incomes. (There were also those, including then-delegate Dawn Clark Netsch, who felt that such specific limitations had no place in a properly drafted constitution.)

As a result of that constitutional compromise, Progress Illinois faces a formidable series of political tasks. Just in order to make a graduated tax possible, lawmakers must first pass a constitutional amendment by 60 percent before May 1 of a general election year; then 60 percent of that fall's voters have to OK it; and finally the General Assembly and the governor have to agree on legislation writing the new amendment into law.

For the last several years, says Jan Flapan, the League of Women Voters had been leading coalitions to lobby for increasing the state income tax. "After a while, people began to say, 'Why just respond to a crisis year after year? Let's do something long-term, not just a short-term fix.'"

By now the annual Illinois state budget crisis has alarmed even fairly conservative observers. Vice president Tim Bramlet of the staid Taxpayers' Federation of Illinois predicts that 1994 will begin a "period of major transition in Illinois government, particularly in regard to our tax structure. . . . Illinois' tax structure and school financing will be major--if not the hottest--issues in the race for governor." Times have changed, and not just according to the liberals who have always preferred a graduated income tax. That's what makes it worth trying again in 1994 for what they couldn't win in 1970.

Still, the potholes in Progress Illinois' political road are plentiful and bipartisan. With a May 1 deadline for action this year, time is short. And both sides have reason to be reluctant. Republicans have an ingrained resistance to any tax change that could conceivably be portrayed as an increase. And Democratic strategists, as Illinois Public Action's associate director John Cameron points out, are especially concerned about tax-sensitive swing districts in the legislature. "We have to make the political argument to house leadership that it's good politics to be for tax fairness."

Nor is it necessarily an asset that Democratic gubernatorial primary candidate Dawn Clark Netsch's tax plan resembles Progress Illinois' to a degree. Instead of a constitutional amendment, Netsch proposes an income tax increase coupled with property tax relief, increased state school funding, and a new set of exemptions graduated according to income. (The graduated exemptions may seem to contradict the spirit of the constitution's flat-tax mandate, but they were foreseen and discussed approvingly on the floor of the 1970 Constitutional Convention.) "What she's saying is still educating people," says Jan Flapan hopefully. On the other hand, according to IVI-IPO legislative consultant David Starrett, if Netsch wins the Democratic gubernatorial primary in March, "There is no way Mike Madigan will allow a different proposition from hers on the ballot."

Is the quest for a graduated state income tax hopelessly quixotic? Thanks to the state's fiscal disarray, property tax revolts, and pressure for additional money for schools, perhaps not. Flapan reports that coalition speakers have been surprisingly well received in Du Page County. Starrett takes heart from the fact that the Republican senate majority leader, "Pate" Philip, once mentioned the possibility of a dollar-for-dollar shift from property tax to a graduated income tax.

Progress Illinois people like to display the results of the voting on the 1992 Education Amendment, which fell just three percentage points short of passage. Outside of Cook, the counties giving it the required 60 percent approval are clustered in largely Republican western and southern Illinois. For this and other reasons, Progress Illinois strategists think a Chicago-downstate coalition makes sense. If they don't get their amendment through the legislature by May Day, they are already planning to be back for 1996.

Art accompanying story in printed newspaper (not available in this archive): illustration/Peter Hannan.

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