Tax Decoded | Summer 2023
Tax the Rich? That’s a Poor Idea
Three tax proposals that promise to generate additional tax revenue and offer a more equitable tax system are part of Illinois’ long history of misled ideas.
Keith Staats, JD
Executive Director, Illinois Chamber Tax Institute
Deciphering Today's State & Federal Tax Law
The Illinois General Assembly’s spring legislative session was relatively benign in relation to taxes. There were no general tax increases or decreases, apart from a modest reduction in the Corporate Franchise Tax, which increased the general exemption from the tax to the first $5,000 in liability from the first $1,000.
From my perspective, however, there were some particularly poor tax proposals introduced that luckily didn’t gain traction this spring. Though, that doesn’t mean these bad ideas won’t resurface in Springfield. Here, I’ll decode three of them.
1. WEALTH TAX
The first bad idea introduced was the Extremely High Wealth Mark-to-Market Tax Act (HB 3039)—also referred to as the wealth tax. The avowed purpose of the legislation is twofold: 1) that it’s unfair that high-net-worth individuals aren’t paying their “fair share” of taxes, and 2) the tax would generate a significant amount of new revenues for the state.
The legislation proposes that every resident taxpayer with net assets of $1 billion or more on Dec. 31 of each year will be required to recognize gains or losses on each asset as if it had been sold at fair market value on that date. The net gain would be taxed at the individual income tax rate of 4.95%.
The legislation is drafted so that the Illinois Department of Revenue could require that someone subject to this tax report it on their IL-1040. The taxpayer would calculate their Illinois base income normally, and then add this new fictional net gain to their base income. In a year where the mark-to-market calculation results in a loss, taxpayers would be allowed to take a subtraction modification in the calculation of base income to the extent of any “regular” income subject to Illinois income taxation. However, because Section 207 of the Illinois Income Tax Act isn’t amended, excess mark-to-market losses for a tax year can’t be carried forward to a subsequent income year to offset income in the later year.
Additionally, the legislation contains provisions to prevent taxpayers from shifting assets to minor children, trusts, and other entities to avoid the tax. The legislation would also require detailed reporting of assets of individuals subject to the tax.
If enacted, I believe it’s likely that this tax would be struck down by the courts due to it violating the Illinois Constitution. For example, Article IX, Section 3(a) of the Constitution forbids the imposition of more than one state income tax, and Article IX, Section 5 forbids the imposition of a personal property tax. In my view, this legislation is either an impermissible second income tax or personal property tax.
2. FINANCIAL TRANSACTION TAX
A second bad tax idea introduced again this year was the Financial Transaction Tax Act (HB 1023), which would impose a “privilege tax” on persons or entities that engage in financial transactions on certain specified exchanges located in Chicago. The tax is imposed on financial “contracts” at a rate of $1 for each transaction for which the underlying asset is an agricultural product, a financial instruments contract, or an options contract.
In the past, proponents of this tax contended that it would be a tax on “speculation,” asserting that the tax wouldn’t affect many people—only the 1%. Proponents have also contended that the tax would generate $10 to $12 billion per year in additional tax revenue for the state.
However, proponents of this tax are wrong on all counts. They’re basing their assertions on a fundamental misunderstanding of the nature of the financial instruments they wish to tax and the persons and entities that would be subject to the tax. The tax would burden the business community and consumers—not just the 1%.
The transactions proposed for taxation are engaged in by a variety of businesses as normal, prudent practices. These businesses include agricultural producers (i.e., farmers) who routinely utilize futures contracts to hedge against commodity price volatility. Manufacturers also use hedging transactions to protect themselves and their customers from volatility of raw material prices and currency risk on the overseas sale of products. Other businesses, such as airlines, use hedging transactions to guard against volatility in fuel prices.
The tax would likely generate little to no revenue because the constitutional and substantive defects in the legislation would trigger a successful legal challenge. The tax would also likely generate little to no revenue because those targeted for taxation would likely cease engaging in transactions subject to tax in Illinois and would likely move to another state because Illinois lacks the legal authority to impose a financial transaction tax on activities outside of its borders.
If enacted, the tax would likely be attacked in the courts as “special legislation” prohibited by Article IV, Section 13 of the Illinois Constitution because the tax is imposed only on transactions of certain named Chicago exchanges.
3. COMMERCIAL DATA COLLECTOR TAX
The last bad idea I’ll delve into is the Commercial Data Collector Tax Act (SB 2307), which would require a monthly excise tax on the collection of consumer data of individual Illinois consumers by commercial data collectors. A “commercial data collector” is defined as a for-profit entity collecting, maintaining, processing, selling, or sharing consumer data in support of its business activities on more than 1 million individual Illinois consumers in a month within the calendar year. The tax is imposed with a graduated rate structure based on the number of Illinois consumers from which the company obtains data. The tax ranges from 5 cents per consumer for the first 1,999,999 consumers up to a maximum of $2.25 million per month, plus 50 cents per consumer per month for companies obtaining data from more than 10 million consumers.
The legislation would likely impact companies such as Meta (Facebook), who collects large amounts of data, as well as insurance and credit reporting companies, among others.
However, like the other two bad ideas, there appear to be fundamental constitutional problems with this tax. Despite being characterized as an excise tax, a review of the true nature of the tax leads me to conclude that the legislation is a form of a personal property tax, albeit on intangible property, that’s forbidden by Article IX, Section 5 of the Illinois Constitution.
None of these three proposals moved forward during the spring legislative session, likely because forecasted tax receipts for the upcoming fiscal year will be sufficient to fund state government. However, if fiscal conditions deteriorate, the Illinois General Assembly will be searching for sources of additional revenues without passing general tax increases. All three of these proposals will be beguiling to many legislators because of the false promise of substantial additional revenue from taxing “the rich.”
Although each of these three proposals promise large increases in state tax revenues without burdening ordinary taxpayers, proponents of these taxes are simply and constitutionally wrong. These taxes won’t generate additional tax revenues, and they certainly won’t result in a more equitable tax system.
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