On March 7, 2019, citing Illinois’ dire fiscal condition, Governor J.B. Pritzker unveiled the details of his “Fair Tax for Illinois” plan, commonly referred to as the “Fair Tax.” Governor Pritzker’s proposal highlights four elements: a graduated personal income tax regime; an increase to the corporate income tax rate from 7% to 7.95%; a 20% increase in the current Property Tax Credit from 5% to 6%; and a $100 per child, Child Tax Credit.(1)
The Governor’s proposal intends to lower the tax bills for individual filers at or below $250,000 of income by altering Illinois’ single individual income tax rate of 4.95%, currently applicable to all taxpayers, to a graduated income structure involving six different individual tax rates. The Governor’s proposed individual income thresholds and corresponding tax rates are as follows:
Income \ Tax Rate
$0 – $10,000 \ 4.75%
$10,001 – $100,000 \ 4.90%
$100,001 – $250,000 \ 4.95%
$250,001 – $500,000 \ 7.75%
$500,001 – $1,000,000 \ 7.85%
$1,000,001 or more \ 7.95%
With respect to those taxpayers earning $1 million or more, entire net income would be taxed at the 7.95% rate. In other words, once income reaches $1 million, the graduated tax structure in fact becomes a flat tax structure and all income is taxed at one rate.
From a business perspective, the Governor’s proposed graduated individual income tax regime has the effect of taxing pass-through business entities at an overall top rate of 9.45%. Since pass-through business entities are subject to an entity level 1.5% Personal Property Tax Replacement Income Tax (“Replacement Tax”) in Illinois, the total tax paid on pass-through entity business income earned by its highest income earners would be increased from the current rate of 6.45% to 9.45%.
Importantly, however, the State of Illinois’ current constitution calls for a flat income tax rate structure, which prohibits Governor Pritzker’s proposed graduated individual income tax structure from becoming law without legislative action.(2) Therefore, the Fair Tax plan, or another similar graduated income tax plan, can only materialize with an Illinois constitutional amendment. The first hurdle for such an amendment is obtaining a three-fifths vote from the Illinois General Assembly. If the three-fifths vote threshold is met at both the Illinois House of Representatives and Illinois State Senate, then the constitutional proposal will be placed on the ballot for the public to decide, which would require a three-fifths vote as well to pass.(3) The earliest that a constitutional amendment would appear on the ballot for voter approval is November 2020. Accordingly, the earliest date a graduated individual income tax could be effective is January 1, 2021.
With respect to the necessary legislative action, the Illinois General Assembly is already beginning to hold discussions regarding an amendment to the Illinois Constitution. A Senate Joint Resolution Constitutional Amendment (SJRCA) (SC0001) (“the Resolution”) proposes to amend the relevant Revenue Article of the Illinois Constitution to remove the provision mandating taxes on or measured by income be at a non-graduated rate.(4) Notably, Senator Don Harmon, who introduced SC0001 on January 29, 2019, previously pushed for the same constitutional amendment as early as 2015. As of today, 11 Senators have joined as co-sponsors of the joint resolution, which is currently with the Subcommittee on Constitutional Amendments. For those particularly interested in seeing the effect of the proposed individual income tax rate changes, we include a link here to the Fair Tax Calculator that was released by the Pritzker administration for this purpose.
A second key element of the Governor’s Fair Tax plan is to purposely match the corporate income tax rate with the highest individual income tax rate, and therefore, his plan proposes to increase the corporate income tax rate from 7% to 7.95%. When adding to that the Replacement Tax imposed on corporations in Illinois at a rate of 2.5%, corporate income would become taxable at a total rate of 10.45%.
Lastly, in addition to tax structure and tax rate proposals, Governor Pritzker’s plan also proposes to increase the Property Tax Credit and add a new tax credit for filers with children. Currently, Illinois provides a Personal Property Tax Credit for individual tax filers equal to 5% of Illinois tax paid on principal residence property. Governor Pritzker’s proposal would increase this property tax-related credit to 6%. Further, the state does not currently offer a tax credit for families raising children. Governor Pritzker’s proposal, however, includes a $100 per child tax credit that would phase-out for single filers with earnings from $40,000 - $80,000 and for joint filers with earnings from $60,000 - $100,000.
While we understand the Illinois Chamber of Commerce opposes the Senate Resolution to amend the Illinois Constitution and other House and Senate Republicans oppose the graduated income tax plan, others are on board with the Governor’s Fair Tax proposal, which purports to reduce individual income tax on most Illinois individuals; therefore, it is too soon to know exactly where the outcome will land. FGMK’s State and Local Tax (“SALT”) team will continue to monitor the progress of the relevant joint resolution and any additional details that the Pritzker administration releases regarding its overall Fair Tax proposal and/or the graduated personal income tax structure.
If you have questions regarding Governor Pritzker’s Fair Tax or graduated individual income tax plan, please contact one of these members of FGMK’s SALT team.
Matthew T. Fuller Carolyn Puzella Marvin R. Bayan
Partner, SALT Senior Manager, Senior Manager, SALT Senior Associate, SALT
847.444.8491 312.239.3413 312.638.2940
MFuller@fgmk.com CPuzella@fgmk.com MBayan@fgmk.com
(1) Office of the Governor of Illinois, “Fair Tax for Illinois,” presentation, March 7, 2019.
(2) Ill. Const. Art. IX, § 3, Cl. A.
(3) Ill. Const. Art. XIV, § 2, Cl. A.
(4) 2019 Ill. S.J.R.C.A. 1