The Illinois “Fair Tax” Explained

On November 3, 2020, Illinois voters will have the opportunity to vote to amend the State Constitution to permit the State to assess income taxes on a graduated rate basis. Currently, the State Constitution requires that all individual taxpayers pay tax at the same rate. The current individual tax rate is 4.95%. Illinois is one of 11 states with a flat income tax rate.

If approved, the constitutional amendment itself will not establish new tax rates. As has always been the case, the legislature and Governor can enact legislation changing the rate. They will just have the ability to charge different rates based on different levels of income.

In June of 2019, the Illinois legislature enacted and the Governor signed Senate Bill 687, which establishes the rates of tax (effective this January) should the constitutional amendment be approved.

The above rates can be further increased (or decreased) by the legislature and the Governor at any time in the future.

You can find out exactly how your Illinois income taxes would be impacted with this graduated income tax calculator.

Proponents of the Fair Tax argue that the State needs additional revenue and that the current flat rate structure is unfair. They argue that the Fair Tax will result in lower rates for most Illinois taxpayers. Notably, the only material rate reductions under the Fair Tax would be for taxpayers earning under $10,000 (to 4.75% from today’s rate of 4.95%). For taxpayers earning less than $100,000 (but more than $10,000) the tax rate on income over $10,000 decreases to 4.90% (from today’s rate of 4.95%). At single or joint income levels above $250,000, the marginal tax rate increases to 7.75%, a nearly 57% increase on income over $250,000.

For single filers earning over $750,000, the overall rate is 7.99% from the first dollar of taxable net income (not just on net income over $750,000). For joint filers earning over $1.0 million, the overall rate is also 7.99% from the first dollar of taxable net income (not just on net income over $1.0 million).

Opponents of the Fair Tax argue that the rate increases will result in increased migration of businesses and business owners outside of Illinois. They note that Illinois is 49th in the nation for net population migration (only Alaska has a worse rate). Opponents of the Fair Tax also point out that the legislature and Governor have not sought meaningful spending or pension reform, and that Illinois taxpayers already bear one of the highest state tax burdens when taking account of income, property and sale taxes.

The constitutional amendment would also allow for substantial increases in the rate of tax on corporate income. Currently, the highest Illinois corporate income rate cannot exceed the highest individual rate by more than a ratio of 8 to 5. With the increase in the highest individual marginal tax rate to 7.99%, corporate tax rates can be increased to as high as 12.8%. Illinois’ current corporate rate is 9.5% and is one of six states with a rate over 9%.

In order to pass, the constitutional amendment requires a yes vote from either (a) 60% of the votes cast for or against the amendment itself or (b) a simple majority of all of those voting in the election.