Illinois Moves Closer to 'Millionaires Tax'

Late last week, the Illinois House Revenue Committee approved a plan to impose a tax surcharge on residents earning more than $1 million a year. 

The measure, backed by Democrat House Speaker Mike Madigan (pictured) would affect around 14,000 individuals and raise a projected $1 billion, earmarked for public schools. The state is also considering extending a temporary income tax increase for all residents, first passed three years ago. 

Illinois has a flat income tax, assessing residents 5% of their yearly income. Madigan's proposal would impose a further 3% for those earning $1 million a year. Asked during the committee hearing why he chose that specific threshold, Madigan said, "that just sounded like a good number."

The twin moves in the Land of Lincoln, enacting a new tax and extending a previous tax hike, contrast with other states, the majority of whom are considering tax cuts. Illinois' neighbors, Wisconsin and Indiana, have both moved to make significant cuts in taxes. 

Gov. Pat Quinn defended extending the income tax hike, saying, "We cannot cut our way to prosperity."

Since Illinois passed the income tax increase in 2011, which raised the individual tax rate from 3.75% to 5%, spending has grown by more than 17%. Illinois has one of the worst fiscal situation among the states. Last year, bond rating firms downgraded the state's debt. The state has the worst bond rating in the country. The bond rating firms have pointed to the states unfunded liabilities and unsustainable spending as the main drivers of its poor outlook. 

Madigan's new tax would be directed to increase funding for the state's public schools, theoretically adding $1 billion to the state's coffers. Of course, this projection is based on the 14,000 individuals who currently earn more than $1 million a year staying in the state and paying the tax. Last decade, Maryland passed a "millionaires tax" that was projected to raise an additional $106 million. 

The next year, however, one-third of the state's millionaires effectively disappeared. The year before the tax was hiked, 3,000 residents of Maryland earned more than $1 million. The first year the tax was in effect, just 2,000 did. The state took in $100 million less from millionaire earners than the year before, despite the higher rate. The tax expired in 2010.

Democrats in Illinois have more than enough votes to pass both tax measures. For almost a decade, Democrats, who control all branches of government in the state, have provided a real-time experiment in using tax and spending increases to bolster the state's finances and underlying economy. 

This November, voters will be asked to provide a judgment on this experiment. 


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