At the Nov. 3, 2020, general election, approximately 55% of Illinois voters rejected the Illinois Fair Tax, a constitutional amendment to allow a graduated income tax.1 The proposed amendment was intended to increase the tax rate on high-income individuals and produce revenue to address the state’s large budget deficit.
Proposed constitutional amendment
The Illinois Constitution provides that “[a] tax on or measured by income shall be at a non-graduated rate.”2 At any given time, only one income tax may be imposed on individuals and one income tax imposed on corporations. The rate of an income tax imposed on corporations may not exceed the rate imposed on individuals by more than a ratio of 8 to 5.3 The proposed amendment would have removed the non-graduated rate and single income tax provisions and provided the General Assembly with the responsibility to determine “the rate or rates of any tax on or measured by income imposed by the State.” Also, under the proposed amendment, the highest rate of income tax imposed on corporations could not exceed the highest rate imposed on individuals by more than a ratio of 8 to 5.
Contingent legislation enacted in 2019
In June 2019, Illinois enacted legislation that would have changed the current flat personal income tax rate to a graduated rate structure if voters approved the amendment to the Illinois Constitution at the November 2020 general election.4 The personal income tax imposed at a flat rate of 4.95%5 would have ranged from 4.75% to 7.99% for tax years beginning on or after Jan. 1, 2021.6 The tax rate would have substantially increased for income over $250,000.7 For high-income individuals ($750,000 for single filers and $1 million for joint filers), the 7.99% rate would have applied to all of the individual’s income. This legislation was crafted as a part of a comprehensive plan to address the state’s large budget deficits and unpaid bills.
Beginning Jan. 1, 2021, the Illinois corporate income tax rate would have increased from 7% to 7.99% if voters approved the constitutional amendment.8 Combined with the 2.5% replacement tax, the new corporate rate would have been 10.49%.
Commentary
This proposed amendment received considerable attention in Illinois and was supported by Gov. J.B. Pritzker. In fact, Pritzker personally spent a large amount of money to encourage the passage of this amendment. The advertising to support the amendment stressed that there would be a tax rate reduction for 97% of Illinois taxpayers, and the tax increase would apply only to high-income individuals. Opposing parties also spent considerable sums to persuade voters to reject this proposal. The advertising sponsored by the opposition noted that the Illinois legislature would be empowered in the future to determine “fair” tax rates. Of course, the legislature would have been able to lower the income thresholds subject to the higher tax rate. Polls taken prior to the election indicated that the vote would be close, but voters ultimately decided to soundly reject the proposal.
The Fair Tax is off the table, but the state still needs to address large budget deficits, inadequate pension funding and substantial unpaid bills. Therefore, the current Illinois tax revenue situation continues to be problematic. Pritzker warned that there will be “painful” budget cuts following the defeat of the Fair Tax.9 The state conceivably could decide to raise the flat income tax rate, but this would apply to everyone and could not be targeted to high-income individuals. Other approaches to raise state revenue could include a return to the suspension of net operating losses, decoupling from bonus depreciation or revisiting an expansion of the sales tax base. Therefore, the rejection of the Fair Tax is likely to result in significant legislative changes to the Illinois tax structure in the near term to address the state’s fiscal crisis.
1 Illinois Top Races, CHICAGO TRIBUNE, Nov. 4, 2020 (unofficial election results).
2 ILL. CONST. art. IX, § 3(a).
3 Id.
4 P.A. 101-0008 (S.B. 687), Laws 2019. For a discussion of this legislation, see GT SALT Alert: “Illinois enacts major tax reform legislation.”
5 35 ILL. COMP. STAT. 5/201(b)(5.4).
6 35 ILL. COMP. STAT. 5/201(b)(5.5); 5/201.1.
7 There would be six different tax rates, but the largest increase would be from 4.95% for income that exceeds $100,000 but does not exceed $250,000 to 7.75% for net income that exceeds $250,000 but does not exceed $350,000 ($500,000 for joint filers).
8 35 ILL. COMP. STAT. 5/201(b)(14), (15).
9 Dan Petrella and Jamie Munks, Pritzker warns ‘there will be cuts, and they will be painful’ after graduated-rate income tax proposal fails at the ballot box, CHICAGO TRIBUNE, Nov. 4, 2020.
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