Tuesday’s election is largely a referendum on the record and character of President Donald Trump. But Illinois voters are also deciding a proposed and highly contentious constitutional amendment that portends a similar battle in Michigan.
The so-called “fair tax” proposal on the Illinois ballot would shift the state from a fixed-rate income tax, in which everyone pays the same flat tax rate, to a graduated income tax that levies progressively higher rates on higher-earning taxpayers.
It’s not exactly a radical idea. The federal government and 32 of the 43 states with income taxes have a graduated income tax, also known as a progressive tax. Michigan, like Illinois, has a constitutionally mandated flat-rate income tax.
Under the Illinois plan, 97% of taxpayers would pay the same or get a slight tax cut. Only the top 3% of tax filers would pay more. Joint filers earning at least $1 million would see their tax rate jump from the current 4.95% to 7.99%.
And many aren’t happy about it. The campaigns for and against the proposal have been dubbed “the battle of the billionaires” in the media.
The effort backing the measure is largely funded by Democratic Illinois Gov. J.B. Pritzker, who has sunk $56.5 million of his own money to the Vote Yes for Fairness group. Pritzker strongly endorsed a graduated income tax during his 2018 gubernatorial campaign.
His cousin, Jennifer Pritzker, has contributed $500,000 to the opposition Coalition to Stop the Proposed Tax Hike Amendment campaign. The Pritzkers are billionaire heirs to the Hyatt Hotel fortune.
Ken Griffin, a billionaire hedge fund manager who is considered to be Illinois’ richest person, has tossed $46.75 million to the anti-progressive tax group.
Unions and grassroots organizations support the proposed constitutional amendment while many business and farm groups, including the Illinois Chamber of Commerce, oppose it. The corporate tax rate would rise to 7.99% from 7% if the proposal passes.
What does this have to do with Michigan? The state could see a similar issue on the 2022 ballot and the fight over it would likely be as contentious.
“If Illinois passes a graduated income tax, that will certainly get attention in Michigan, and it will motivate progressives in Michigan to try,” said Charles Ballard, a Michigan State University economist.
A coalition of community groups known as Fair Tax Michigan attempted earlier this year to place a question on Tuesday’s ballot calling for the state to replace its flat personal income tax with a graduated tax.
The group suspended its efforts amid the COVID-19 pandemic, but said it is planning for a 2022 effort. A possible campaign already is facing opposition from groups such as the politically powerful Michigan Chamber of Commerce, which says a graduated income tax “punishes success and suffocates the entrepreneurial spirit.”
Groups backing a progressive income tax in Michigan and Illinois are driven by different motivations.
Illinois is facing a $6.5 billion budget gap this year. The state also has racked up $8 billion in past-due bills and is $140 billion short in funding promised pension benefits.
The “fair tax” proposal would raise an estimated $3.4 billion annually to help meet those obligations. Opponents, citing the state’s long history of corruption and poor financial management, say there’s no guarantee the extra money would be spent responsibly.
It’s a fair point. But Pritzker has vowed to restore the state’s finances. Tapping the wealthy might be more politically palatable than raising taxes on those less able to pay or implementing severe austerity measures.
Michigan is in far better fiscal shape than Illinois. The Michigan “fair tax” proposal would have raised an additional $1.5 billion annually to supplement school aid money and upgrade infrastructure.
Stronger schools, good roads and other infrastructure would make Michigan a more attractive state for business investment.
A graduated income tax plan that cuts taxes for millions of state residents would help lower-income families, which spend a higher proportion of their income on living expenses, “free up money to purchase the goods and services that they need in order to achieve economic security,” according to the Michigan League for Public Policy.
The league has backed a progressive income tax as a way of boosting needed tax revenue as inflation-adjusted general fund and school aid fund revenues have fallen over the past decade.
Ballard said a graduated income tax system also could narrow long-escalating income inequality, which has widened during the coronavirus pandemic.
“I am stronger in my views in favor of progressive taxation than I was a few decades ago, precisely because the ability to pay taxes is much more concentrated among the affluent than it used to be,” he told me.
If voters defeat the graduated income tax proposal in Illinois, it would be a serious blow to efforts to enact one in Michigan. But a win would be no guarantee of success here, either.
Those who have the ability to pay more in taxes also have outsized political and financial power to head off initiatives that would make them dig deeper in their pocketbooks.