The Illinois General Assembly last week passed legislation to reform the state’s underfunded (by some $100 billion) public employee pension system – even at the risk of a legal challenge from unions or their members.
Supported by Illinois Governor Pat Quinn, who signed the bill into law late last week, and all but one state legislator on a 10-member bipartisan pension conference committee, the reforms are estimated to save Illinois $160 million over the next 30 years and fully fund the public pension funds by 2044.
Unions and their supporters insist such reforms are not just unfair, but unconstitutional.Even if such reforms lessen the impact of escalating pension costs on the state’s budget, Illinois still must come to grips with how income taxes for both businesses and individuals fit into the revenue side of a fiscally balanced equation.
Back in 2011, Democratic legislators – by votes of 60-57 in the House of Representatives and 30-29 in the Senate (without any Republican support) – approved a “temporary” income tax increase of 46 percent on businesses and 66 percent on individuals. The state’s flat income tax rates jumped from 5 percent to 7 percent for business and from 3 percent to 5 percent for individuals.
That income tax hike is scheduled to sunset after 2014 at an estimated cost to Illinois of some $7 billion in annual revenue on a budget that typically has about $16 billion in discretionary spending after pensions ($9 billion), schools ($7 billion) and Medicaid ($15 billion).
Now a special-interest group called A Better Illinois is pushing state lawmakers to put a constitutional amendment on the November 2014 ballot to abandon the flat income tax rate in favor of a graduated, or “progressive,” tax used by the federal government and most states. With a graduated rate, higher earners pay a higher percentage of their income than low-wage earners.
Changing the Illinois Constitution’s flat tax rate mandate will require a three-fifths vote in the state legislature – with resolutions both in favor and in opposition already introduced in both the House and Senate – and approval by voters.
The Illinois Chamber of Commerce, which endorsed the pension reform, is strongly opposed to the graduated income tax due, in part, to its potentially negative impact on small businesses operating as sole proprietors or a pass-through entity (partnerships, Sub-S corporations, LLPs, LLCs) who pay individual income tax on their business income.
Since a graduated rate is forecast to generate more revenue than the flat rate, the question is: How many businesses and individuals will pay more in income taxes?
John R. Quigley is president and CEO of the Elmhurst Chamber of Commerce.