Should Illinois adopt a 'millionaires tax'? Expert breaks it down | ChicagoLIVE

Okay, so this, I'm really interested in this next topic here. I know you will be as well at home. Cook County, let me roll this back. On your November 3rd midterm ballot, whether you early vote or you vote on November 3rd, there's going to be a question for Cook County residents, and it is, do you think that millionaires should pay an income tax surcharge of 3%? That money then would be used to cover school funding, public school funding, and also give people some property tax relief. Joining us here to talk more about this is Deborah Carroll. She's professor and director of the Government Finance Research Center at the University of Illinois, Chicago. Good morning, Deborah. Good morning. Thank you for having me. Yeah, I'm glad you can hear us. So from a financial standpoint, how beneficial could this be for Cook County? This could be extremely beneficial. So the proposal that's going to be on the ballot, it's important to keep in mind that this is just advisory. This is not going to be a binding initiative in any way. But they want to gauge taxpayers' support for this proposal. And so the proposal is to add a 3% surcharge on net income above $1 million. So the majority of taxpayers will not be negatively impacted by this. We're talking about 40,000 taxpayers or about 1%, of the top income earners that would pay an additional tax on, again, that income over $1 million. And that has the potential to yield, I've seen estimates, between $2 and $4 billion per year, increasing up to $5 billion. within the next five years that, as you mentioned, could be used to or will be used to provide property tax relief up to 20 percent for homeowners, as well as provide additional funding for K through 12 education. You mentioned that this is a measure that is non-binding. It's not necessarily going to be creating a new tax. I'm sort of curious why that is rather than binding? Why are we doing sort of an advisory? And then what steps would Illinois need to take before this actually became a law? So the Illinois state constitution actually requires that our state income tax be a flat tax, which it currently is, which means that There needs to be three-fifths vote in the General Assembly and support of taxpayers to actually implement this. So not only would the legislature have to create the law and pass the law to add this surcharge, we would actually need a change to our state constitution to allow for this more graduated income tax to be implemented. Okay, so obviously there's going to be a benefit to some folks, but I'm sure you've gotten or heard pushback from those who are making over a million dollars. What have those complaints or comments been? Most of the folks who are sort of opposed to this surcharge feel that it will induce people to leave the state, that it will hamper economic growth. And there is some concern of that, but that's actually not really what the data show us. So the state of Massachusetts, for example, they recently added a 4% surcharge to net incomes over a million dollars, and they actually saw a rather sizable 30-some percent increase in their population growth. Washington, D.C. did not add a surcharge, but they increased their top income bracket tax rate. They saw about a 23% growth in residents. Right now, Illinois is actually seeing population growth. From about 2013 to 2023, Illinois added about 125,000 taxpayers during that period of time. In the last three years alone, Illinois has seen growth each year in its population, adding about another 100,000 taxpayers. And the important thing to keep in mind is that these individuals are high income. So middle income, people moving into the state, we saw about a 16% increase, but we saw doubling or a 100% increase of millionaires moving into the state. One other thing to keep in mind, however, is that there are lots of different forms of business, mostly small local business, that are taxed according to the personal property tax system. And so those individuals who earn, again, net income over a million dollars on their small businesses would be subject to this tax. And I've seen estimates of that being about 73 percent of these additional or these 40,000 taxpayers that this would affect. Yeah, I was doing the math there, too, and I came up with that as well. There's about 40, 41,000 people that make over a million dollars in the state. um when you break that down to Cook County it's like 15 to 20,000 people that would be included would have to pay this you know um governor Pritzker championed a campaign to get something like this done it was on the ballot and people in the state of Illinois said no and they said no because as you mentioned um Deborah right now in the state constitution we have a flat income tax so no matter how much money you you make you pay the same you know whether you're making $60,000 a year or you're making $600,000, you're paying the same flat income tax. The alternative to that would be a graduated income tax. So depending on how much you make, you would pay more in taxes. There was a risk, though, that I think a lot of people understood that if the General Assembly can put in parameters around how much people are taxed, then they could continue to lower that number. So maybe you're making $100,000 and you get left out of the people that are taxed additionally the first couple years, but then they decide, well, the state needs a little more money, so now we're going to just push that threshold and continue to lower it. Is that a real risk, a real concern? Certainly with all states that have graduated income taxes and the federal government has a graduated income tax, there is risk of increasing those income brackets or that sort of cutoff threshold of $1 million and increasing the rates on those. Normally, that is done just to keep pace with inflation. However, one thing I do want to point out, though, I know that most Illinois residents are very tied to this flat income tax that we have currently. However, it's actually not as equitable as you might think. And the reason being is that Illinois, like most states, the starting point for state income tax returns is your federal adjusted gross income. Now, at the federal level, there are lots of provisions, deductions, exemptions, credits that are part of the tax system that wealthier people tend to benefit more from. So when the average income earner does their federal income tax returns, normally we take the standard deduction because it's not beneficial for us to do otherwise because we don't have a lot of expenses or we don't qualify for those other provisions. Wealthier individuals, however, tend to itemize their deductions, which means they can take advantage of many more provisions in the tax code to lower their tax burden, which is why you hear about multimillionaires paying fewer dollars in taxes than grandma, right? They haven't done anything illegal. They're just using the tax system to their advantage. And so once they're done with taking advantage of all of those provisions at the federal level, that then gives their adjusted gross income that serves as the basis for our flat state income tax. And so even though you're paying sort of the same percentage across the board because of a flat income tax, wealthier individuals are not at the same starting point as the rest of the normal Illinois population. Well, thank you for explaining that because I didn't realize that that was a piece of this puzzle. What are our neighboring states doing? Do they have a graduated income tax in Wisconsin and Indiana? The majority of states do have progressive or graduated income taxes. One of the things to keep in mind is even though we do have this sort of flat tax in Illinois, we are actually quite a regressive tax state. And what that means, we're about number eight in the nation in terms of tax regressivity. What that means is that lower-income individuals actually pay a higher portion of their income to taxes than higher-income individuals. And this tends to reflect primarily in our property tax systems, whereas sort of the middle-class, you know, average homeowner is paying between 4% and 7% in property taxes. millionaires are paying less than 1% in property taxes. So making this change would help to bring about a greater progressivity and match our neighboring states to a better extent. Deborah Carroll, we appreciate you breaking this down for us. It's a heavy loaded topic, but whenever we have an expert like yourself on to be able to kind of break it all down, it makes it much easier to digest. So we do appreciate you. Thank you for taking the time. Thank you. Have a great day.