Illinois Faces Cuts, Tax Increases After Ballot Measure Fails

(Bloomberg Government) -- Illinois lawmakers will be forced to cut state spending and scrounge for new revenue in 2021 after a ballot measure to repeal Illinois’ 50-year-old flat-rate income tax hit a brick wall.

Counting will likely continue for several days, but the committee supporting the constitutional amendment conceded there was no path to victory. The Associated Press has reported 55% of voters rejected the proposed “Illinois Allow for Graduated Income Tax Amendment,” with 98% of the vote counted.

The ballot measure, crafted and bankrolled by Democratic Gov. J.B. Pritzker, would have repealed the current 4.95% flat personal income tax rate. Approval would then open the door to a six-bracket graduated system envisioned under a separate law (SB 687) enacted last year. The new rates range from 4.75% for low-income earners to 7.99% for joint filers earning over $1 million annually. The governor has estimated the change would raise roughly $3.5 billion annually.

Across the country, voters considered dozens of statewide ballot proposals and constitutional amendments adjusting tax policies during Tuesday’s general election. The conservative-leaning National Taxpayers Union estimated the various ballot measures sought to impose $25 billion in new annual tax burdens.

The Tax Foundation pointed to a mixed bag of results across the states on three critical income tax questions.

“Illinois voters rejected a high graduated rate income tax while Arizonans embraced a large income tax rate increase for high earners, among the many attention-grabbing results from Tuesday’s elections—most of which, admittedly, weren’t about taxes,” Jared Walczak, vice president of state tax policy at the Tax Foundation wrote. “Coloradans, meanwhile, ratified an income tax cut in a year that many expected voters to instead be weighing in on a substantial income tax increase—and that was before the pandemic.”

The failure of the measure in Illinois raises significant questions about Pritzker’s strategy to fund state operations next year. Pritzker addressed that question before the vote and referenced comments by Lt. Gov. Juliana Stratton, who warned the state might have to raise its personal income tax 20% if the fair tax failed. Under that scenario, lawmakers may be forced to bump the 4.95% flat-rate a full percentage point on all taxpayers to manage the state’s fiscal crisis, which includes an $8.3 billion backlog of unpaid bills and unfunded pension liabilities topping $137.2 billion.

“We need to do something,” Pritzker said Monday. “Either we’ve got to cut virtually everything in state government by about 15%—that means education, public safety and so many human services people rely on—find revenue.”

Quentin Fulks, chairman of the “Vote Yes for Fairness Committee” pushing the plan made similar comments in his concession statement.

“Now lawmakers must address a multi-billion dollar budget gap without the ability to ask the wealthy to pay their fair share,” he said. “Fair Tax opponents must answer for whatever comes next.”

Alaska, California Property Tax Impact

Alaska voters were asked to overhaul the Oil and Gas Production Tax and raise taxes on drillers operating in the state’s North Slope oil fields. Oil companies invested nearly $20 million in a campaign to defeat the measure, asserting the plan would boost production taxes between 150% and 300% and destroy the most important industry in the state. Final results have not been tallied but the Tax Foundation reported the campaign to defeat the measure has an upper hand, winning 57% of the votes counted thus far.

California voters were asked to step away from 42 years of property tax caps and pass Proposition 15, the Schools and Communities First Initiative. The ballot measure allows residential property owners to retain a system that caps annual property tax bills at 1% of the purchase price, with a maximum increase of 2% a year for inflation. But business and commercial property would once again be assessed annually based on current market value. According to the Tax Foundation, opponents of the proposition had an edge with 52% of the total votes banked thus far.

Louisiana voters approved a measure (Amendment 2) that could raise property taxes paid by oil producers. The amendment permits the presence or production of oil to be considered when assessing the fair market value of a well for ad valorem property tax purposes.

New Tax Bracket

Elsewhere, Arizona moved close to approving an income tax increase on the state’s highest earners to fund education (Prop. 208). The Invest in Education Act would add a 3.5% surcharge on taxable income over $500,000 for a married couple starting Jan. 1. A legislative analysis estimates the measure would generate $827 million in new revenue during its first full year. Arizona’s Secretary of State reported ballots are still being counted but supporters had an edge as of Wednesday morning, with 52.5% of voters supporting the change.

Colorado taxpayers approved a measure (Proposition 116) that would cut the state’s flat income tax rate from 4.63% to 4.55% for tax year 2020 and beyond. The policy change would provide $154 million in tax relief next year. Colorado’s Secretary of State reported the measure passed handily. .

Laura Mahoney in Sacramento, Calif., Brenna Goth in Phoenix, Jennifer Kay in Miami, Paul Shukovsky in Seattle and Tripp Baltz in Denver also contributed to this story.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Kathy Larsen at klarsen@bloombergtax.com

©2020 Bloomberg L.P.