Washington state is one of several with no state income tax. Among others are Nevada, Texas, Florida and — contiguous to “Taxachusetts” and socialist Vermont — tiny New Hampshire. Florida is a magnet for residents of New York and New Jersey.
Several years ago, there was a fair tax ballot initiative to introduce a state income tax in Washington state. Voters were told it only applied to the rich. It shouldn’t have been so hard to vote to raise taxes on other people, but the initiative was voted down. Voters may have thought “them today, but me tomorrow.” We face a similar question in a few weeks, so thought is in order.
Business creativity coming out of Washington state has enriched us all immeasurably. Boeing at an earlier time with headquarters, but not production, here. Microsoft and Amazon came out of Washington garages, and with two outlets and long lines on the ISU campus Starbucks. What the first mate on Moby Dick’s Pequod ship (named Starbuck) has to do with coffee remains unclear to me. While socially more liberal voters did not want to mess with the entrepreneur-friendly culture of their state.
Now to Illinois. The 1970 Constitution provides that if Illinois were to have an income tax, it would be flat. This means after a few deductions, everyone pays the same percentage of their income. Our federal tax system is graduated, and those with higher incomes pay at higher rates. Despite noise to the contrary, that much-maligned top 1% pays a higher percentage of their income than the lower groups. Anyone can fully avoid all federal taxes by quitting their jobs and investing in the loophole tax-free municipal bonds.
What was in the minds of those 1970 framers of the Illinois Constitution that they put that restriction in? My answer is that they had a feel for Illinois politics. Illinois politicians need restraints. Most of us have a sense of this and we know it is nothing new. It came to me watching that excellent film “Lincoln.” It was, as Yogi Berra said, déjà vu all over again. The film had the narrow theme of getting the votes for the 13th Amendment abolishing slavery. Lincoln knew how to get things done, and more than 150 years later, it is the same game.
Do we want to loosen current restraints on our politicians? We should look at the favors they have given to the politically connected.
They are stuck with the longtime 3% and now 4.975% rate, but loopholes are the purview of our legislators. A loophole is a preference or deduction that someone else gets. If it is yours, it is fair, just and for the benefit of the common good. Most of us would agree the property tax reduction for low-income seniors is the right thing.
That said, every deduction is a revenue hemorrhage and as a state employee, I really like being paid. Last year, I got a $206 tax credit for property tax paid on my residence. A credit means I paid $206 less in income tax.
By contrast, a deduction means my taxable income is less. Pick up my house and move it a few miles east and the credit would be over $400 or think of the credit for those living on Chicago’s North Shore. This is a politically popular credit that is unnecessary and totally favors the rich. Think of the revenue hemorrhage. Illinois politics at work!
We are just warming up. Check out the Illinois Department of Revenue schedule M. Pages of preferences for the connected. My line is 24. I have an investment in what is labeled Chicago sub zone 24 z and get a deduction of about $6,000. Others might be putting a zero or two on my deduction. I call this perfectly legal corruption. I don’t believe our politicians are evil. They are playing the Illinois political game following in the footsteps of Lincoln. Once there, undoing a deduction is not politically easy. For example, many people have never forgiven President Ronald Reagan for tightening the deduction for employee paid business expenses.
If we vote to amend our constitution, there will be winners. That magnet Florida will be one. A friend of mine who had lived in Hinsdale for decades has just relocated just over the line to Wisconsin. This is the category of taxpayers who can easily relocate to another state. Northwest Indiana is an easy commute to Chicago, so live there, work in Chicago and your income tax is paid to Indiana.
Getting rid of schedule M and the property tax credit might well generate a lot more revenue than raising rates on those with higher incomes. We might also think that most of these current credits and deductions favor those with higher incomes. While we need to be careful who is making the argument, lowering tax rates can raise more revenue. Fairness and justice can really be in the eye of the beholder, but the early 21st Century reduction in capital gains tax from 28% to 20% and then 15% showed an enormous increase in revenue, as investors felt they were no longer locked into stale investments because of the taxes to trade for a better future.
OK, the bottom line. If you think Illinois politics is coming into a new era and a graduated tax is fairer, you know how to vote. If you think the constitutional framers of 1970 and the voters in Washington state had it right, then mark your ballot accordingly.
Varner is a professor of finance, insurance and law at Illinois State University
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