Tim’s Tax News on the Tenth – October 2020
THE ILLINOIS “FAIR TAX” ON THE BALLOT
This November election there will be on the election ballot a proposal to amend the Constitution of the State of Illinois. The Constitution of the State of Illinois is the governing document of the state of Illinois. There have been four Illinois Constitutions. The current, fourth, version was adopted in 1970. The 1970 constitution is referred to as the "Constitution of Illinois of 1970" or less formally as the "1970 Constitution."
The Illinois 1970 Constitution was adopted on December 15, 1970, and has been amended 14 times since its adoption. As compared to the United States Constitution, which since 1789 the U.S. Constitution has been amended 27 times, and of those 27 amendments, the first 10 -- collectively known as the Bill of Rights were certified on December 15, 1791. Therefore, since 1791 the United States Constitution has been amended 17 times.
On November 3, 2020, Illinois voters will be asked to vote to amend the State Constitution to permit the State to assess income taxes on a graduated rate basis. Currently, the State Constitution requires that all individual taxpayers pay tax at the same rate. The current individual tax rate is 4.95%. Illinois is one of 11 states with a flat income tax rate.
If approved, the constitutional amendment itself will not establish new tax rates. As has always been the case, the legislature and Governor can enact legislation changing the rate. They will just have the ability to charge different rates based on different levels of income.
In June of 2019, the Illinois legislature enacted and the Governor signed Senate Bill 687, which establishes the rates of tax (effective this January) should the constitutional amendment be approved. The new rate brackets are summarized below.
| Single Income Level | Joint Income Level | Marginal Tax Rate |
|---|---|---|
| Up to $10,000 | Up to $10,000 | 4.75% |
| $10,001 - $100,000 | $10,001 - $100,000 | 4.90% |
| $100,001 - $250,000 | $100,001 - $250,000 | 4.95% |
| $250,001 - $350,000 | $250,001 - $500,000 | 7.75% |
| $350,001 - $750,000 | $500,001 - $1,000,000 | 7.85% |
| Over $750,000 | Over $1,000,000 | 7.99% on ALL net income |
The above rates can be further increased (or decreased) by the legislature and the Governor at any time in the future.
Proponents of the Fair Tax argue that the State needs additional revenue and that the current flat rate structure is unfair. They argue that the Fair Tax will result in lower rates for most Illinois taxpayers. Notably, the only material rate reductions under the Fair Tax would be for taxpayers earning under $10,000 (to 4.75% from today’s rate of 4.95%). For taxpayers earning less than $100,000 (but more than $10,000) the tax rate on income over $10,000 decreases to 4.90% (from today’s rate of 4.95%). At single or joint income levels above $250,000, the marginal tax rate increases to 7.75%, a nearly 57% increase on income over $250,000.
Opponents of the Fair Tax argue that the rate increases will result in increased migration of businesses and business owners outside of Illinois. They note that Illinois is 49th in the nation for net population migration (Alaska is 50th). Opponents of the Fair Tax also point out that the legislature and Governor have not sought meaningful spending or pension reform, and that Illinois taxpayers already bear one of the highest state tax burdens when taking account of income, property, and sale taxes.
The constitutional amendment would also allow for substantial increases in the rate of tax on corporate income. Currently, the highest Illinois corporate income rate cannot exceed the highest individual rate by more than a ratio of 8 to 5. With the increase in the highest individual marginal tax rate to 7.99%, corporate tax rates can be increased to as high as 12.8%. Illinois’ current corporate rate is 9.5% and is one of six states with a rate over 9%.
If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 28 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com and find out how we can help you.
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