Sunday, November 2, 2008

Is It Time for a Con Con -- Part IV

Editors note: I did a lot of work researching the Illinois Constitutional Convention; I'm going to post that research that I wrote up here. It should be about five or six parts in all. I'll do a post or two a day.
Part I
Part II
Part III

Income tax: Of the 41 states that have a state income tax, Illinois has the lowest personal income tax rate and one of the lowest corporate tax rates in the nation. The state has a flat rate of three-percent for personal income and a 4.8 percent rate for corporations. According to the 1970 Constitution the income tax rate is determined by an eight to five (business to individual) rate ratio and has only been hiked twice—once temporarily—since the Constitution was written.

Obviously there are and will be a plethora of opinions about changing the income tax. Those who want to change the tax rate, especially those in favor of changing education funding, will want to raise the rate and then use that revenue to help fund schools in the state. This would lower the burden on funding from local governments for education—and may well lead to a lowering of property taxes.

Proponents of changing the income tax will also point that the poor and middle class in Illinois pay a higher percentage in taxes than those who are wealthy. These reformers will fight to change the income tax in Illinois from a flat tax to a progressive tax where people with higher incomes pay a higher rate of income tax to the state.

The current revenue system places a lot of stress on local governments to raise their own revenue to pay for services. This means that there is a dependence on property taxes, casino/lottery revenue, and sales taxes at both the state and local level. The recent hike in the Cook County sales taxes, giving Chicago the highest sales tax rate of any major city in America, will probably be used as a means of calling for a Con Con. Many will argue that by increasing the income tax and distributing the revenue from the increase will lessen the burden that the county and city governments have in funding services (not only in Chicago but across the state). Therefore they will be able to lower sales taxes and other current forms of taxation that local government’s place upon constituents.

Yet, Chicago falls 13th behind New York, Philadelphia, Portland, Milwaukee, Atlanta, Detroit and Boston when totaling the amount of state and local taxes that a household making $75 thousand pays—or 10.4 percent of income. Based on 2003 data, the tax burden of Chicago, when compared to the largest cities of other states, is not nearly as bad as proponents will claim. Chicago did rank 4th in sales tax but what Chicagoans pay in income taxes was near the bottom and property taxes were still lower than New York and Los Angeles (coming in 12th overall).

However, those in the business community will not want to change the rate and would fight any proposed change. And they will probably gain support from an unlikely source—unions. The Illinois Education Association has already come out against the Con Con. The teachers union is afraid that they may lose pension benefits if a Con Con is called. While other unions, like the AFL-CIO, do not have a lot at stake since they do not have pensions tied to the state—they will probably stand in solidarity with the teachers union.

But to add to the twist, businesses do see the more than $100 billion in debt that the state is under. And much of that debt comes from pension benefits. Because of underfunding since the 1970s, the pension system in the state was only 48 percent funded in 2003. Unless reformed, the state will continue to owe 8.5 percent interest on the $43 billion unfunded pension liability annually—$3.7 billion a year. The huge debt created because of pensions may gain the attention of reformers. At that point it is anyone’s guess at how things would play out. If the income tax is raised, that money may go towards pensions. Or the pension system in the state may be changed to a two tiered system where new employees would see considerably less in pension benefits.

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