Reality check on 5 false claims used to boost Pritzker’s ‘fair tax’

Voters can expect to be bombarded by claims about the ‘fair tax’ until Nov. 3 – but what are the facts? Proponents have made misleading claims in hopes of convincing Illinoisans to do away with the flat tax.

Gov. J.B. Pritzker so far put $56.5 million of his own money into convincing voters they should scrap Illinois’ constitutionally protected flat income tax on Nov. 3. Most of that money will buy ads boosting what have been the progressive tax backers’ most popular – and deceptive – spins.

Here are the top claims Illinoisans can expect to hear, and the realities they should remember.

Claim 1: It is just as difficult to raise taxes under a progressive tax as it is under a flat tax.

Reality: It is easier to raise taxes under a progressive income tax than it is under a flat tax.

A flat tax makes it far harder for politicians to raise taxes. A progressive income tax allows politicians to divide and conquer. They can segment Illinoisans into small income groups and increase taxes on each, one at a time.

They can hold taxes constant for the majority in any given year, while gradually raising taxes on everyone – one group at a time. They can go after retirees. They can tax the same $1 multiple times. Division allows lawmakers to skirt backlash from voters.

The flat tax encourages political accountability. Many of the politicians who voted for the 2017 tax hike were either forced to retire or voted out of office.

In the 32 states with progressive income taxes, 18 of them subject middle-class families to the highest tax rate. All of them tax retirees.

Claim 2: We can fix inequality with this “fair tax.”

Reality: Income inequality is higher in progressive tax states, and the gap between rich and poor in those states has not been shrinking.

Illinois imposes the nation’s third-greatest tax burden on those in the lowest 20% of wage earners, or about $1,800. The progressive tax would save the average person in that group only $6 – while decreasing their job prospects.

Poverty rates skyrocketed after Connecticut enacted a progressive income tax, and that was while poverty rates were falling in most other states. Connecticut in 1996 was the last state to scrap its flat tax for progressive rates.

Not only is income inequality, measured by the Gini coefficient, higher in states with progressive income taxes, those states haven’t been any more effective at combatting rising inequality. The difference in income inequality between progressive and non-progressive income tax states remains unchanged when the two are compared over the past decade.

Because Pritzker is unwilling to consider structural reforms to the state’s cost drivers, the lowest income Illinoisans under his tax plan pay the greatest share of their income in state and local taxes – compared to other income groups – and suffer the most from a lagging economy.

Claim 3: A graduated income tax hike won’t harm the state’s economy.

Reality: The vast body of peer-reviewed academic literature shows tax hikes and progressive income taxes hurt the economy.

There are claims that the $3.7 billion “fair tax” increase will have no effect on the economy, but there is significant consensus among academic experts that tax hikes do harm the economy. More than that, economists and policy experts are in near-unanimous agreement that the financial chaos created by COVID-19 is exactly the wrong time for a new tax. As former President Barack Obama said, “You don’t raise taxes in a recession.”

Everyone from Nobel Prize winners such as Edward Prescott to former chairs of the Council of Economic Advisors – including Christina Romer in the Obama Administration, the Director of the Congressional Budget Office Douglas Holtz-Eakin, George W. Bush economic advisors Harvey Rosen and Greg Mankiw, whose textbooks are the most widely used in macroeconomics – agree. They say higher taxes hurt economic growth and that higher marginal tax rates reduce small business employment, the wages of their employees and their growth. New studies are consistently confirming these results.

Even the left-leaning Tax Policy Center admits that in the long-run, “High marginal tax rates can discourage work, saving, investment and innovation, while specific tax preferences can affect the allocation of economic resources.” They also state that in the short run, “Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse.”

To say that tax hikes don’t harm the economy is simply wrong. The governor’s $3.7 billion tax hike will hurt the economy.

There is also a broad consensus that the optimal income tax – i.e. the one that hurts the economy the least – is a flat tax. Even UC Berkeley economist Emmanuel Saez agrees optimal income taxes should be “progressive on average but not on the margin.” Illinois’ current flat tax accomplishes this goal because of the value of exemptions and deductions for lower-income tax filers.

As if more proof were needed to show that people respond to tax policy, Illinoisans need only look at the governor himself. Pritzker is currently under federal investigation for removing the toilets from his Gold Coast mansion in order to receive $331,000 in property tax breaks. The governor also has been widely criticized for utilizing offshore trusts to avoid paying taxes on his multi-billion dollar fortune.

Claim 4: We need this tax to pay for education – or else.

Reality: Despite billions in increased education funding each year, most of these funds have been diverted from classrooms to pay for pensions.

During the past 20 years, state education spending, adjusted for inflation, has increased by $5.4 billion annually. However, two-thirds of this increase has gone to pensions instead of classrooms. Despite the syphoning of state education funds by pensions, Illinois still spends more per pupil than every Midwestern state except for North Dakota, but yields below average educational outcomes. Bloated district-level administration is a major reason why more dollars are not advancing students. Without structural reforms, a progressive income tax will be a tax for pensions – not for school funding.

Claim 5: The choice is simple, either raise revenue through (1) the “fair tax,” (2) a flat tax increase for everyone or (3) enact spending cuts of 15% across the board.

Reality: This is a false choice. Illinois can balance the budget and fund services without higher taxes.

Illinoisans have been paying higher and higher taxes every year. Meanwhile, the fiscal condition of the state has continued to sink and the COVID-19 recession is pushing it deeper. New revenue can’t fix a broken state system.

Illinois leaders should learn from past mistakes instead of constantly presenting a false choice to lawmakers and residents. The governor claims there are only three ways to close the state’s daunting $4.6 billion deficit: a federal COVID-19 bailout, massive tax hikes or slashing core government services such as education, public safety and social services.

That’s not true. Another option exists: Illinois can make structural spending reforms to the core cost drivers of its overspending, protect essential services and reduce the tax burden on Illinois residents at the same time. The Illinois Policy Institute’s five-year plan, Illinois Forward, could accomplish all three through commonsense reforms that have received bipartisan support in the past.

Structural spending reform would enable lawmakers to balance the state budget immediately. In fewer than five years, they could eliminate the state’s bill backlog and finance a deficit-neutral income tax cut. Contrary to the governor’s claims, this can be accomplished without cuts to core services that provide value to Illinois residents.

Illinois can build a new reality that draws new residents and heals injuries sustained during COVID-19, but political leaders first need to stop claiming they can tax their way to prosperity.