Thursday, March 27, 2014

Madigan's millionaires tax has its political advantages

By Jamey Dunn

The House revenue and finance committee dove right into the topic of taxes this morning following Gov. Pat Quinn’s budget speech yesterday.

The committee today approved Speaker Michael Madigan’s proposal to tax millionaires at a higher rate to fund education and rejected a measure that would have allowed for a graduated income tax in the state. As protesters flowed into the capitol chanting, “We want a fair tax,” the House revenue and finance committee voted down a proposed constitutional amendment that would allow Illinois to have a graduated income tax. Currently, the state’s Constitution requires a flat income tax.

Committee members cited concerns that the proposed amendment does not include the progressive tax rates structure, but simply would change the Constitution to allow the legislature to approve a graduated tax. “I don’t believe its wise to put simple a strike through amendment on the ballot. I think the better approach is to enumerate what would be asked of the voters,” Riverside Democratic Rep. Michael Zalewski said before he voted against the amendment today.

Supporters of the plan say that it is best not to enshrine tax rates into the Constitution, because the threshold for changing the document is so high. “Actually embodying rates in the Constitution from just a good government and policy standpoint is very problematic because if you’ve got that rate wrong or you’d like a change, now you need a new constitutional amendment. It’s far better the have the rate structure be a creature of legislation so that you can adjust your tax policy over time,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability. Oak Park Democratic Sen. Don Harmon, sponsor of a Senate version of the graduated tax amendment, unveiled proposed rates earlier this week.

Martire said that the concept of taxing the wealthy at a higher rate, which is also at the core of Madigan’s proposal, is a good policy choice because most income growth is occurring amongst higher earners. However, he said that putting the specifics, such as the rate and the $1 million cut off, in the constitution does not allow for the flexibility that would be needed as the economy changes and inflation marches forward. For example, if in the future lawmaker decide that the rate is too high, or that $1 million is not what it used to be in terms of earnings, or that they want some of the money to go to health care instead of education, they will have to gain the support of three-fifths of both chambers and then wait for an election. They then would need to get the support of either three fifths of voters who vote on the question or the majority of voters participating in the election. If some of those details were determined by legislation instead, they could be changed by a simple vote in each chamber and the governor's signature.

Policy debates aside, Madigan’s proposal, which would impose a 3 percent surcharge on income offer $1 million, likely won out for a number of reasons. It would be a much easier vote than voting for the graduated income tax for lawmakers who have few millionaires in their area. Marion Democratic Rep. John Bradley, who is chairman of the committee, said as much before he voted in favor of the proposal. “This is an opportunity for a lot of areas of the state to actually do a lot better with minimal impact on my region.” There seems to be a perception among lawmakers that Madigan’s amendment is ready for primetime, while the graduated tax is not. “The speaker’s amendment is more show ready than this,” Zalewski during committee today. The graduated income tax proposal does not have the needed support to pass in the House. Still, Harmon said he has not given up hope on the graduated tax idea. He told supporters today “do not despair,” and said that the fight has just begun.

Conservative groups and business organizations are opposed to both. However, it does seem that the opposition has been hitting the graduated tax proposal much harder. National groups such as American’s for Prosperity and The Tax Foundation have joined the fray over the graduated tax plan. Of course, it has been around a lot longer so opposition has had more time to build and organize. Todd Maisch, the vice president of government affairs for the Illinois Chamber of Commerce, said at today’s hearing that the flat tax is a “key incentive” for businesses considering Illinois. And that the graduated tax comes from a “soak the rich mentality” that send a negative message to businesses and successful individuals. He also said Madigan’s plan would hit small businesses that file their taxes as individuals.” We think it’s just the wrong public policy to punish them with this surcharge.” If either of these plans is going to pass in the House, it would likely need the support of all Democratic members, something the graduated tax lacks. (For a comprehensive look at the graduated tax proposal and the arguments for and against it, see Illinois Issues January 2014. )

Madigan’s plan would probably be easier for voters to understand if it makes it to the general election ballot. It would also likely be very popular with anyone who is not bringing in $1 million (or close to it) annually because they would not be affected. It could also be useful as campaign ammunition that Quinn could against his opponent, multimillionaire Republican Bruce Rauner, who opposes the plan. The proposal would not conflict with Quinn proposal to make the temporary income tax increase permanent and give homeowners a $500 refund to defer property tax costs. Quinn is also asking to double the Earned Income Tax Credit for low-income workers from 10 to 20 percent. If this proposal and Madigan’s end up working in concert, it would be a rudimentary version of a graduated plan because lower earners would have more of their tax burden deferred and higher earners would pay more. It might have less nuance and flexibility than a graduated tax plan, but it would also be free of the political baggage of claims that it would hurt the middle class (depending on where you think the cut off is for the middle class).

 Martire says that, while he thinks the graduated tax amendment if better policy, the politics of the situation cannot be put aside. “Any legislation or constitutional amendment that moves through a very political process has to take political concerns into account or it wouldn’t be a very sophisticated approach to changing policy,” he said after the hearing. “Illinois is at least moving towards a fairer tax structure and moving toward amending its Constitution to permit a fairer tax structure. Now the questions is whether or not that amendment is going to be the best one that we could have.”

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