Gov. Pritzker Unveils Graduated Tax Proposal

Throughout the general election campaign last year, then-candidate JB Pritzker advocated for the need for Illinois to amend its constitution to scrap the current flat-tax and, instead, allow the state to create and impose a graduated income tax. During the campaign, he avoided questions as to what rates he would suggest repeatedly stating that such rates had to be negotiated with the Assembly. Today, the Governor’s Office released their suggested plan although the plan was not negotiated with the leaders – at least to this point. You can peruse the proposed plan here.

According to the Governor’s Office, 97.2% of state income tax payers would not experience an income tax increase (from the current 4.95%). Here is an overview of the proposal as it relates to income tax rates:

Adjusted Gross Income

Marginal Rates

Impacted taxpayers

$0 – $10,000

4.75%

27.20%

$10,001 – $100,000

4.90%

58.90%

$100,001 – $250,000

4.95%

11.10%

$250,001 – $500,000

7.75%

1.90%

$500,001 – $1,000,000

7.85%

0.60%

over $1,000,000

7.95%

0.30%

Additionally, the Corporate Income Tax (CIT) rate would be set at 7.95%. Today, the CIT rate is currently 7.00%.

None of these rates include the Personal Property Replacement Tax (PPRT). Corporations pay an additional 2.5% on income meaning the effective CIT would be 10.45%. For pass-through entities (partnerships, trust, and S-Corps), the PPRT is 1.5%. That 1.5% is paid off the top from the federal Form 1065 Schedule K. Remaining monies are then distributed to partners who pay at the individual rate. Nevertheless, this plan will hit pass-through entities harder.

These proposed rates would give Illinois the second highest income taxes on corporations in the nation behind only Iowa. In terms of personal income taxes, Illinois would be 7th highest in the nation for both the highest lowest rate (4.75%) and for the highest rate (7.95%). Again, it is not possible at this writing to calculate the impact on pass-through entities but they will certainly pay more.

There are a few proposed changes to credits as well. First, the Governor is proposing a 20% increase in the current property tax credit from $500 million to $600 million. Second, he is including a proposed $100 per child tax credit. For single filers the child credit is for those under $80,000 per year, but it phases out starting at $40,000. For joint-files, the child credit is for those under $100,000 per year but it starts phasing-out at $60,000.

The Governor’s Office estimates the net revenue from this proposal to be $3.4 billion annually.

It is vital to remember that this plan is a long way from becoming reality and there is nothing to say it can’t be changed. First, both chambers have to approve putting a constitutional amendment on the ballot. That requires a 3/5ths vote in both chambers. Second, if that happens, the question will then appear on the ballot in November 2020. Third, the question will then have to receive 50% support of ALL the people casting ballots in the election (will never happen because not everyone votes the entire ballot) or 60% of those voting on the question. Fourth, if they meet that threshold, the Assembly will have to approve the rates. Now, the Assembly could put into law these rates with a provision that states ‘if and only if the constitutional amendment is approved’ but that still would not preclude them from coming back and changing the rates. Bottom line: there is at least 19 more months before anything can happen.

 

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