The graduated tax amendment was trailing by a 55-45 percent margin on Tuesday with 89 percent of the vote in the state counted.

"When all the votes are counted, we believe there will be more 'no' votes than 'yes' votes, and that will be a win for small business owners, middle-class families, family farmers, retirees, and large employers," said Lissa Druss, Spokesperson for the Coalition to Stop the Proposed Tax Hike Amendment. "In this election, Illinois voters sent a resounding message that with an $8 billion deficit and two massive tax hikes in the last ten years, we cannot trust Springfield Politicians with another tax hike."

THe amendment would have amended Article 9, Section 3 of the Illinois Constitution. The new language would read:

“The General Assembly shall provide by law for the rate or rates of any tax on or measured by income imposed by the State. In any such tax imposed upon corporations the highest rate shall not exceed the highest rate imposed on individuals by more than a ratio of 8 to 5.”

That would replace the current language, which states:

“A tax on or measured by income shall be at a non-graduated rate. At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations. In any such tax imposed upon corporations the rate shall not exceed the rate imposed on individuals by more than a ratio of 8 to 5.”

If it receives 60 percent of the vote from those voting on the question, it passes. But if it fails to reach the 60 percent threshold for those voting on the question but still musters “yes” votes from more than half of those voting in the election, it would still pass.

Due to outstanding mail ballots and the multiple paths to passage, results could take weeks to certify.

What it does

The amendment removes a provision from the Illinois Constitution that requires any income tax to be levied at a flat rate on any level of income – the current rate is 4.95 percent.

Passage of the amendment would allow lawmakers to apply different tax rates on varying levels of income. Of the 42 states that have an income tax, 32 and Washington, D.C., have a graduated rate structure, while Illinois is one of nine that impose a flat tax.

While the amendment itself does not set any tax rates, legislation already passed by lawmakers and signed by the governor would take effect in January if the amendment passes. The rates created by that legislation would apply to six tax brackets, ranging from 4.75 percent on income up to $10,000 to 7.99 percent on all income for individual filers making more than $750,000.

The rate structure

Senate Bill 687 is the accompanying legislation to set graduated rates beginning in January 2021 should the amendment pass.

The new rate structure would create six tax brackets, with rates applying to margins of taxable income instead of every penny of an earner’s income, except for those in the top bracket. The rates would be:

4.75 percent on single or joint filers’ first $10,000 of taxable income

4.9 percent on single or joint filers’ income from over $10,000 to $100,000

4.95 percent on single or joint filers’ income from over $100,000 to $250,000

7.75 percent on a single filer’s income from over $250,000 to $350,000 and joint filers’ from over $250,000 to $500,000

7.85 percent on a single filer’s income from over $350,000 to $750,000 and joint filers’ from over $500,000 to $1 million

Once a single filer exceeds $750,000 or joint filers exceed $1 million, the top rate of 7.99 percent will apply at a flat rate to every penny of income. For all other earners, the previous brackets apply.

Those rates effectively mean anyone earning $250,000 or less will pay the same or lower income tax rates under the graduated structure, while those earning above that amount would pay higher rates.

The measure also raises the corporate tax rate to 7.99 percent from 7 percent and does not change the Corporate Property Replacement tax of 1.5 to 2.5 percent which already exists in current law.

It also raises the property tax credit from 5 percent to 6 percent, and creates a $100 per-child tax credit for joint filers earning less than $60,000 annually and single filers earning less than $40,000 annually. The tax credit would decrease by $5 per child for every $2,000 of income a filer has above those amounts.

Neither the amendment nor the accompanying legislation would change the level of authority lawmakers have to raise tax rates. A simple majority vote from both chambers in the General Assembly and a signature from the governor is all that is needed to raise rates currently, and that would remain the case with the passage of the amendment.

Fiscal Background

In estimates released before the COVID-19 pandemic, the governor’s office said the graduated tax is expected to bring in about $1.2 billion for the current fiscal year as it would be in place for only part of it, and $3.4 billion once it is in place for a full year.

Gov. JB Pritzker has said the amendment and the rates approved are all about raising more revenue without increasing rates on middle-income earners or making drastic budget cuts to state services, education and public safety.

Pritzker frequently notes he inherited a state government “hollowed out” by budget cuts from previous administrations and a two-year state budget impasse during which the state spent roughly $5 billion more than it took in each year, driving a backlog of unpaid bills up to $16 billion. As of Tuesday, Nov. 3, the Illinois State Comptroller’s office estimated the backlog stood at roughly $8.3 billion.

Pritzker has estimated the budget shortfall for the current fiscal year at $6.2 billion, as the COVID-19 pandemic has blown a hole in state finances. Without the graduated tax, which would be in effect for only half of the fiscal year, the shortfall could reach $7.4 billion, he said in April.

To fill that gap, the governor has left open the option of borrowing billions from the federal government and has lobbied for greater aid to states in another federal stimulus package.

But even before the pandemic, Pritzker pegged Illinois’ structural, year-after-year budget deficit at $3.2 billion, and he has framed the graduated tax debate as a choice between 15 percent across-the-board cuts to state government, a 20-percent flat tax hike or passage of the graduated rates.

On Sept. 24, Lt. Gov. Juliana Stratton said lawmakers “will be forced to consider raising income taxes on all Illinois residents by at least 20 percent, regardless of their level of income” if the graduated income tax fails. That would push the current tax rate to about 6 percent, and would require a simple majority vote in a Legislature dominated by Democrats with or without the passage of the amendment.

Pritzker’s Tuesday comments on if it fails

At his daily COVID-19 briefing Tuesday afternoon, Pritzker said he was optimistic about the results of the graduated tax measure but said he was not sure results would be known quickly, due to the number of outstanding mail ballots.

“As I've said many times before, the options for Illinois without the fair tax are not good,” he said.

He again noted one option is raising revenue “on a very regressive basis” by raising the flat tax.

“It is significantly regressive, it benefits the wealthy, and it hurts the middle class and those who are striving to get there,” he said of the flat tax. “And there's no doubt that Illinois would need revenue in addition to obviously looking at cuts in state government as we have,” he said.

He once again said cuts could lead to reductions in public safety, education and human services dollars by up to 15 percent “exactly at a moment when people need these things most.”

“And so, the alternatives are not good. That's why I proposed a third way, I didn't think that either one of those seemed like a good idea,” Pritzker said.

Retirement Claims

The graduated tax amendment does not create a retirement tax or change the vote threshold needed from lawmakers to create one.

But opposition groups point to June comments from Treasurer Michael Frerichs, a Democrat who has no role in setting tax rates, who said it was “worth a discussion” to consider taxing retirement income on certain brackets.

While the graduated tax would make it possible to implement taxes on high-earning retirees without taxing all retirees, Pritzker has said he and Democrats in the General Assembly oppose taxing any retirement income, and the idea remains widely unpopular in Illinois – one of 12 states that do not tax retirement income. Of those 12, nine do not levy income taxes at all.

The senior advocacy group AARP held a news conference in October noting added revenue from the graduated tax could make lawmakers less likely to tax retirement income in order to fill budget gaps. But opponents continue to point to Frerichs’ comments, although the treasurer has since said he does not support a retirement tax.

Other arguments

Opposition, led in large part by the Illinois Chamber of Commerce, has centered on what the tax would do to businesses and what lawmakers might do in the future if voters give them the opportunity to levy taxes on portions of the electorate at any one time, rather than on every taxpayer at once.

They also point out the added revenues would not cover state budget deficits amid the pandemic and would require further tax hikes in the future, which could mean adjusting the brackets to raise rates on middle-income earners.

The idea, according to much of the advertising against the amendment, is that giving state politicians the authority to raise taxes on just a small group of taxpayers at any one time makes it easier politically to raise taxes, even though the simple majority vote threshold remains unchanged.

While those against the measure say the increase to the corporate tax rate will hit job creators hard at a time when the pandemic is already making it difficult to remain afloat, proponents note that businesses structured as pass-through entities – such as S corporations, sole proprietors and others who claim business income on personal taxes – will see taxes decrease if they earn less than $250,000 annually in taxable income.

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