… while unintended consequences may be severe
Illinois is facing a constitutional amendment to eliminate the flat tax that has been in place for years. our Governor thinks that a change to Illinois’s tax program is the ticket to buy the state out of trouble. Unfortunately the numbers just don’t add up.
I found the following paragraph on the AARP website supporting the “Fair Tax” Amendment.
Illinois was drowning in debt. The pandemic has caused large parts of the economy to shut down and significantly reduced many sources of state revenue, like from income and sales taxes, as well as gaming. As a result, Illinois now faces a budget shortfall of $6.2 billion. If the graduated income tax ballot initiative does not pass, this shortfall will climb to $7.4 billion.
The article was called “Facts and Fallacies”, and this was listed as a fact. Unfortunately, it is a fallacy. These numbers are calculated under the assumption that nothing other than the tax formula will change. As I discussed in an earlier segment of this series, the behavior of the State’s greatest tax contributors will change.
Many highly paid Illinoisans will choose to reduce their income or stall its growth. Earlier, I discussed forgoing a promotion to avoid the higher tax rates, but this is not the only strategy Illinoisans will employ. Executive perks such as travel, cars, and luxury offices can be categorized as corporate expenses reducing personal as well as corporate taxation. Additionally, promises of corporate charitable giving can sub in for personal compensation. But most employers and executives will agree to reduce taxable income in favor of retirement income or deferred compensation.
It is important to note that retirement income is not taxed in Illinois – for now (take heed AARP). Following the amendment’s passage, Illinoisans will move to maximize their IRAs, profit sharing plans, and defined benefits plans or pensions. There are limits to all of these, but each removes money from the State’s pool of taxable income.
Deferred compensation such as vested options and stock sharing, will increase as a share of executive compensation. These programs do not generate taxable income until the assets are sold and can be held indefinitely without contributing any State revenue.
There will also be Illinois tax contributors who choose to set up permanent residence in Florida or Texas, where there is no (0%) state Income tax. New York and New Jersey have been suffering from the flight of its most wealthy for decades.
But there is another issue at work here and that is the danger of corporate flight. Illinois – and Chicago in particular – is viewed nationally and internationally as an unsafe environment due to guns, riots and looting, a high murder rate, an ineffective police force, and general, all-around poor, civic management. Meanwhile, the political climate is critical of right-leaning dissent and intolerant of most religion. As an additional 3% state income tax is added on to these issues, corporations considering a move to Chicago may take a pass, but the real fear is that corporations already here will choose to uproot and move to a more hospitable state with a lower tax rate and a friendlier climate to its executives.
With all these things taken into account, what does that $3 billion per year promised income really look like? I haven’t run any numbers, but I can imagine it being $2.5 billion additional in the first year – because behavioral change takes time – but $0 additional by the end of year five or six. The program might in total collect as little as $8-10 billion while offsetting that with a billion or two of additional unchecked spending – all this toward out deficit of $64 billion today and maybe as much as $100 billion at the end of the decade.
Meanwhile, we will have emboldened an already corrupt legislation to purchase more votes with tax payer dollars, witnessed the flight of many of Illinois’ best citizens, and diminished Chicago’s status as an international business center.
Now some naysayers may call me a chicken little. They will argue that there are far too many successful professionals and corporations in Chicago for a little flight to have any overall impact. And those that stay will contribute all the tax revenue the state needs to accomplish the State’s objectives of paying off the debt and increasing government services. But history offers a response t that. Detroit was one of the richest cities in the country in the 1960s and politicians making the same arguments we are hearing today increased taxes on the wealthy and driving them to the suburbs, leaving Detroit with a diminished tax base, ballooning costs of social programs supporting its urban poor, and leading the city into bankruptcy.
The COVID pandemic has dramatically increased state expenditures and decreased states revenue. This is the single greatest deficit ballooning event in history. There is no instant panacea. Revenues will need to be increased and costs will need to be cut in order to dig out of this hole. To think that regular Illinoisans will be able to get through this unscathed while Scrooge McDuck and the Monopoly Guy foot the bill is absurd. Regardless, which way this constitutional amendment goes, our politicians need to get their heads out of the sand, roll up their sleeves, and reform five decades of terrible governance.