Fair Taxes

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As a Tax Professional, I have been asked frequently about the Proposed Amendment to the Illinois Constitution or what has been referred to as the “Fair Tax for Illinois” Amendment.

First and foremost, I believe calling this a “Fair Tax” is very misleading. Politicians who support this amendment are hoping the masses will blindly vote for a so-named “Fair Tax”. Illinois which currently has a flat 4.95% income tax which is imposed on the taxable income of the state’s residents and Illinois source income for the state’s non-residents.

A “flat tax”, such as the state imposes is actually about as “fair” of a tax as imaginable. You have more taxable income; you pay more tax. You have less taxable income; you pay less tax. That is about as “fair” as a tax structure can be.

Here are some facts about the State of Illinois current tax system:

  • Retirees receive a substantial tax break. None of their federally taxable retirement income is taxable in Illinois. This includes Social Security retirement benefits, IRA distributions, 401(k) distributions and pension distributions. Illinois can be a very income tax friendly for many retirees who make this state their home.
  • Low to moderate income wage earners may qualify for the state’s Earned Income Credit. Taxpayers who receive a federal Earned Income Credit receive 18% of that credit as the state’s Earned Income Credit.
  • Illinois has figured out ways to get upper income taxpayers to pay more tax without a Constitutional Amendment. Single taxpayers with incomes $250,000 or more and married couples with incomes of $500,000 or more already pay more tax. At those income thresholds these people don’t get to claim exemption allowances for themselves or their dependents. These people also lose their real estate tax credit which is 5% of their property tax bill offset their state income tax. They also lose their ability to claim a K-12 education expense credit.
  • Businesses pay on top of our state’s flat tax rate. They are assessed something called the “Replacement Tax”. Corporations pay 2.5% replacement tax. Partnerships, LLC’s and S-corporations pay a 1.5% replacement tax. Only sole proprietors avoid paying replacement tax.

Illinois does not need a progressive tax regimen. Take a look at Indiana, they have 3.23% flat tax rate and maintain a budget surplus. Conversely, take a look at states like California, New York and New Jersey (all of which have a progressive tax). How do their state budgets outshine Illinois?

Has anyone ever noticed the IL-1040 Schedule G? Taxpayers can make donations to a handful of charitable causes which either reduce your refund or increase the amount you owe. Here’s a suggestion. If you are a billionaire like a Warren Buffet, Bill Gates, JB Pritzker or anyone else who are happy to pay more tax, let’s add a line to Schedule G allowing voluntary contributions to end the state’s budget shortfall.