Pritzker’s Illinois Exit Ramp

WSJ Editorial March 16, 2019

Illinois has been a fiscal mess for years, but a saving grace has been that the state Constitution mandates a flat tax rate that is now 4.95% on personal income. This makes it harder to raise taxes because politicians have to include the middle class. Now Governor J.B. Pritzker is bidding to blow up that safety valve with a progressive tax that would drive even more taxpayers out of the state.

Mr. Pritzker, a Hyatt hotel scion who is already rich, this month rolled out a plan that purports to cut taxes on most residents while only soaking the rich. Taxpayers earning less than $10,000 would pay 4.75%, and those earning less than $100,000 would pay 4.9%. The 4.95% rate would stay the same for anyone making up to $250,000, but then the rate jumps to 7.75% with a top rate of 7.95% on $1 million and higher.

That top rate is even worse than it looks because it includes a recapture provision that would make millionaires pay a flat rate of 7.95% on every dollar of income, not merely the next marginal dollar. Look for anyone who can do so to avoid reporting income of $1 million or leave the state.

Mr. Pritzker claims his “fair tax” would raise $3.4 billion in new annual revenue. But when the Illinois Policy Institute crunched the numbers with Mr. Pritzker’s new rates, it came up $1 billion short. When it asked for the math and assumptions behind his figures, the Governor’s office asked for a delay because it didn’t have the information in hand.

The Tax Foundation says the Governor’s proposal would catapult Illinois into the ranks of states with the worst tax burdens. Corporate income would be taxed at 10.45%, the third highest rate in the U.S., while pass-through business income would face a top rate of 9.45%, fourth highest. If the Governor manages to enact all that he’s proposed, Illinois would drop from 36th on the State Business Tax Climate index to third worst after New Jersey and California. Congratulations.

All of this comes at an especially difficult time for Illinois when it is losing people, after its neighbors have reduced tax rates, when its pension system is at least $135 billion underfunded, and when its wealthiest taxpayers are already paying more because of the $10,000 federal limit on the state-and-local tax deduction.

With his proposal, Mr. Pritzker is doing the bidding of the state’s public unions, which have long run the state through the office of House Speaker Michael Madigan. Having run Republican Bruce Rauner out of town after one term without reforming any part of government, these rulers for life now want to eliminate the last fiscal restraint in the state.

As it happens, all of this was predicted by no less than investor Warren Buffett late last month. In a Feb. 25 interview on CNBC, Mr. Buffett warned investors to avoid states with large unfunded pension liabilities. He said he couldn’t be sure how such states would try to bring in more revenue—whether by raising corporate taxes, personal income taxes, or a combination. But he had no doubt the taxes are coming.

When he looks at the billions that some states owe, Mr. Buffett said he asks himself: “Why do I wanna build a plant there that has to sit there for 30 or 40 years? Cause I’ll be here for the life of the pension—plan—and they will come after corporations, they’ll come after individuals. They—just—they’re gonna have to raise a lotta money.”

Mr. Buffett didn’t mention Illinois specifically, but everyone knows that’s one of the states he is talking about. With his tax proposal, Mr. Pritzker has now confirmed everything Mr. Buffett said.

The state Legislature can change the state Constitution with a three-fifths majority in both houses, which Democrats have, and then if voters approve it as a ballot measure in the next election. If they succeed in replacing the state’s flat tax system, the Illinois tax-rate increases won’t stop at 7.95%.