As opposed to Capitol Hill, where there is gridlock amid a divided federal government, most states around the country are under unified political control, with Republicans running the governor’s mansion and both chambers of the legislature in 24 states, while the Democrats do likewise in 13 states. As the halfway point of 2014 approaches, the two parties continue to take the states where they have unified partisan control in diametrically opposite directions from a policy standpoint.
In Democrat-run Illinois, whose state legislature is the place where President Obama learned the political ropes, liberal fiscal policy and its effects are on full display. Gov. Pat Quinn (D) signed into law massive “temporary” tax increases – a 66 percent individual income tax hike and 23 percent hike in the corporate rate – upon taking office in 2011. Gov. Quinn is now determined to prevent those tax increases from expiring later this year. However, in just the last few months, there have been a procession of additional tax increases proposed in the Land of Lincoln.
First there was the “millionaire’s tax” proposed by Speaker Mike Madigan (D-Chicago), the most powerful guy in Springfield, which would have actually increased taxes on the majority of small business profits in the state. Speaker Madigan recently withdrew the bill due to insufficient support from his own party.
Then there was the bill to impose a statewide soda tax, which would just punish lower and middle income households (the blue collar family on Chicago’s South Side is going to feel the pinch from an extra levy on a bottle of Coca-Cola a whole lot more than will the corporate lawyer in Winnetka), while doing nothing to improve health.
Now progressive activists, Democrat legislators, and the government employee unions who fund them both have their sights set on a graduated income tax, that way they can divide taxpayers into groups and mug them one at a time. Constitutional amendments that would move the Illinois income tax from a flat five percent to a progressive structure have been introduced by Rep. Naomi Jakobsson (D-Champaign) and Senator Don Harmon (D-Oak Park). Rep. Jakobsson’s proposal would result in seven income tax brackets, with the top rate nearly doubled to nine percent.
The Center for Budget and Policy Priorities (CBPP), a liberal think tank, is a vocal proponent of the Illinois progressive income tax proposals. CBPP claims a graduated income tax will reduce income inequality. However, in a report issued this week, the non-partisan Tax Foundation points out how CBPP’s claim in completely false. As the Tax Foundation rebuttal of CBPP notes, while there is little variability in income inequality between progressive and flat tax states, income inequality is actually greater on average in states with a progressive income tax.
In fact, Illinois’ tax competitiveness would take a major hit if it were to adopt a progressive income tax. The Tax Foundation’s State Business Tax Climate measures and ranks the business tax climates of all 50 states in terms of economic competitiveness. The think tank has determined that should Rep. Jakobsson’s progressive income tax bill be approved, Illinois would drop from having the 32nd to 44th worst state business tax climate in the nation.
Of the 41 states with an income tax, eight of them have a flat tax. North Carolina was the most recent to join the flat tax state ranks with the passage of its historic tax reform bill in 2013, which reduced and flattened the state’s income tax, taking the top rate from 7.75 percent (previously the highest in the Southeast), to a flat 5.8 percent. With the bottom rate previously at six percent, all North Carolina taxpayers saw a rate reduction this year.
Flat Income Tax States
Illinois lawmakers aren’t the only ones considering making their state revenues more volatile by instituting a progressive income tax. 2014 has seen renewed interest in a graduated income tax in Massachusetts, where Senate Majority Leader Stanley Rosenburg (D-Amherst) and others have introduced a constitutional amendment that would give the state legislature the authority to impose a tiered income tax.
Though lawmakers on Beacon Hill covet a progressive income tax, even the residents of deep blue Massachusetts, a state that went for Obama 61-38 percent in the 2012 presidential election, recognize the benefits that come with a flat tax, such as equal treatment from the tax man and greater budget stability. Since 1962, Bay State voters have rejected progressive income tax proposals at the ballot on five separate occasions, most recently in 1994.
Democratic state lawmakers, liberal advocacy groups, and other supporters of progressive income taxes claim that those who have higher incomes should pay more in taxes. Well, that is precisely what happens under a flat tax. Under a 5.25% flat tax like the one in Massachusetts, an individual with taxable income of $40,000 a year would owe the state $2,100, whereas someone with taxable income of $100,000 in a year would pay $5,250 in state income tax.
Tax Foundation economist Scott Drenkard made a strong case for moving to a flat state income tax in testimony before the North Carolina Senate Finance Committee last year, noting that “economic literature on progressive income taxes is especially unkind.” Drenkard pointed to an OECD study that found reductions in the top marginal income tax rate are beneficial to long term growth, as well as host of academic studies finding higher marginal tax rates reduce economic growth.
Lawmakers in Illinois, Massachusetts, and elsewhere would be wise to reject progressive income tax proposals. Fortunately, many states – such as Arizona, Louisiana, Nebraska, Wisconsin, Missouri, Georgia, and others – are considering proposals to move in the opposite direction, toward lower, flatter, more equitable and competitive state tax codes.
As has been mentioned in this space before, there is a great public policy experiment taking place in the U.S., and it is happening in state capitals across the country. States continue to move in different directions on fiscal policy and will, in time, demonstrate which approach works best.
Patrick Gleason is Director of State Affairs at Americans for Tax Reform. Follow him on Twitter @PatrickMGleason