Graduating to a Graduated Tax Rate

Illinois’ voters face a historic decision in a ballot measure amending the state Constitution to introduce a graduated income tax rate.

This November, voters across the U.S. will make many important decisions about the future direction and leadership of our country, states, cities, and counties. But Illinois voters will face a unique decision: whether or not to amend the Illinois Constitution’s Article IX. If approved, this amendment would lift the limitations on income taxation and allow the state to move from a flat income tax rate for individuals and corporations to a graduated income tax rate. Gov. J.B. Pritzker campaigned on moving to a graduated income tax rate and it has guided his strategic approach in his tenure thus far. (For the record, the Illinois CPA Society remains neutral on this ballot question due to the diverse interests of our membership. Although neutral, we are available to legislative leaders and their staffs to respond to questions with objective and technical information.)

Here’s what to know about this ballot measure:

The History of the Graduated Tax Rate

Illinois’ current Constitution was adopted in 1970 and has been amended 12 times since then. The last amendment was approved by voters in 2016 with the approval of the Transportation Taxes and Fees Lockbox Amendment to securitize transportation funds. When discussing the 1970 Illinois Constitution, Gov. Richard Ogilvie felt that the 1870 state Constitution would not allow for a graduated income tax. Instead, he proposed a flat rate for the state income tax, which was passed by the General Assembly. The 1970 Constitutional Convention Delegates carried forward the flat rate concept from the 1870 state Constitution which remains in place today.

Roughly 50 years later, in 2019, both the Illinois House and Senate passed Senate Joint Resolution (SJR) 1, calling for voters to adopt or reject their proposed amendments to Section 3 of Article IX, which would allow a graduated tax rate. The resolution also specifies the wording of Article IX, Section 3 will be changed to read: “The General Assembly shall provide by law for the rate or rates of any tax measured by income imposed by the state.”

At the same time the Illinois House and Senate were passing SJR 1, the General Assembly passed Senate Bill 687 (Public Act 101-0008), which created a schedule of graduated income-based tax rates for individuals, trusts, and estates for taxable years beginning on or after Jan. 1, 2021. The Act also established that corporations would be taxed at a rate of 7.99 percent. These propositions for a graduated income tax rate are the ballot measures we’re voting on this November and will only be enacted if the ballot measure is approved by voters.

The Illinois Constitutional Amendment Act requires the General Assembly to prepare and distribute to the electorate a brief explanation of the proposed amendment and two brief arguments— one for the amendment and one against. SJR 1 contains this explanation and those arguments, which will be printed and mailed by the secretary of state to each registered voter’s home prior to the general election.

The Voters Decide

The General Election will be held on Nov. 3, 2020. In order for the graduated tax amendment to be adopted, it must receive a majority vote of the electors voting in the election or three out of five electors voting on the proposed amendment. The Constitutional Amendment Act requires the State Board of Elections to certify the election results within 20 days of the election. Depending on Illinois voters and the State Board of Election’s ability to certify the general election in a timely manner, the graduated income rate could be effective January 2021.

Prior to the emergence of COVID-19, the graduated income tax rate proposal was positioned as a panacea for Illinois’ precarious finances. The totality of the lingering economic impact of the pandemic continues to grow, as well as the tremendous impact on state tax receipts. As Illinois continues to struggle financially in the wake of the pandemic, it is not certain this ballot measure will be enough to balance the state budget. Regardless of the graduated tax outcome, many difficult decisions lie ahead for the governor, the General Assembly, and the voters on state spending, public pension reform, property taxes, and more. However, it is necessary to resolve these issues so that Illinois can begin moving forward again.

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Author’s Note: This column includes my personal observations of the evolution of the legislative environment and are not necessarily the views of the Illinois CPA Society.