If voters approve the graduated income tax question Nov. 3, Illinois will still be about $3 billion shy of recouping income tax revenue the state stands to lose in the wake of the pandemic, said Orphe Divounguy, an economist for the Illinois Policy Institute. That could lead to further income tax increases as lawmakers search for more funds to balance the budget, Divounguy said, calling for the state to scrap the question and pursue other revenue fixes.
"The anticipated income tax revenue from the current progressive income tax rates won't cover half of the projected budget deficit — let alone the billions more lost in personal income tax revenue — prompting the state to raise income tax rates on everyone to cover the shortfall," Divounguy said in a statement. "A tax hike in November would only act to halt any potential economic recovery from the virus subsiding."
The ballot question doesn't set forth any specific tax rates, but it would remove the state constitution's prohibition of a graduated income tax. Currently, it would enable companion legislation lawmakers passed last year that would switch the rates from a flat 4.95% to rates ranging from 4.75% to 7.99%.
However, the institute cautioned in a report released Tuesday that those rates wouldn't suffice. Instead, the report said, the rates would have to be raised to between 5.16% and 10.23% to account for lost income tax collections attributable to a spike in unemployment and shuttered businesses as the state works to control the spread of COVID-19, the respiratory disease caused by the virus.
Divounguy told Law360 that the institute believes the state could save $2.4 billion by reducing the annual 3% cost-of-living adjustment for its pensions to match the rate of inflation. Illinois also relies heavily on income taxes to raise revenue, and leaning on more stable taxes, such as property and sales taxes, would help Illinois weather future fiscal downturns, he said.
The institute isn't advocating for spending cuts at the moment because that could hurt the state even more, but it believes the state should rein in its spending long term, Divounguy said.
The progressive income tax proposal has drawn the ire of conservatives and business groups in the state since the question was finalized. But even as the measure's opponents have called for the question to be removed in response to COVID-19, Steve Brown, a spokesman for state House Speaker Michael Madigan, D-Chicago, told Law360 there are no plans to do so.
"I don't believe there's any rational reason to change the course at this point in time," Brown said, adding that the current plan is projected to cut income taxes for about 97% of the state's taxpayers.
Quentin Fulks, a spokesman for the Vote Yes for Fairness campaign, which is backing the measure, told Law360 that he considered the call to remove the question a political talking point pushed by the question's opponents.
"The fair tax is fundamentally about fairness and ensuring we have a tax system that works for all Illinoisans, which will be especially important as we work to help those who are hurt the most by the coronavirus crisis," Fulks said.
Asked whether he expects lawmakers to repeal the question, Divounguy said it "should not be off the table." The General Assembly should avoid putting a tax increase before the voters as the state is recovering from an economic downturn, he said.
"Raising taxes mitigates all the positive that comes from a fiscal stimulus from the federal government," he said. "Illinois should avoid making that mistake in 2020."
Gov. J.B. Pritzker, a first-term Democrat, has advocated for the graduated income tax proposal. A representative for his office did not respond to questions.
However, the governor said in a statement Wednesday that the state's revenue forecast has been revised for the coming fiscal year to reflect a drop in tax collections caused by the pandemic. Illinois will face a $6.2 billion budget gap in fiscal year 2021 if the ballot question passes, and a $7.4 billion gap if the question fails, according to the revised forecast.
Pritzker vowed to enact a budget, but he signaled that changes to the spending plan may be on the horizon to combat the virus' drain on the state coffers.
"We will need to make extraordinarily difficult decisions on top of the difficult decisions we've already made, but together with the state Legislature, we will make them, and we will do so with an unswerving dedication to fairness," Pritzker said.
--Editing by Neil Cohen.
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