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Wed April 16, 2014
The Vanishing Millionaire Tax
House Speaker Michael Madigan pulled his plan for a so-called "millionaire tax" last week. The plan would have raised taxes on those earning $1 million or more a year, with the proceeds going to schools. It would have required a constitutional change.
Professor Brian Gaines has studied the idea. He's with the Institute of Government and Public Affairs at the University of Illinois. He called Madigan's change of heart a bit surprising:
Brian Gaines' essay on the "millionaire tax" -
In less than a month, Illinois House Speaker Michael Madigan recently introduced, and then withdrew, a constitutional amendment to add a 3 percent tax surcharge on incomes over $1 million. He argued that it could raise roughly $1 billion annually for schools, and then blamed the minority party — Republicans — for refusing to back it. That the plan stalled could be surprising, in light of survey data that seem to show strong support with voters.
In an October 2012 YouGov study, Illinois survey respondents were asked to express support or opposition to 14 ideas for addressing the state’s budget situation, and the single most popular option was “Increasing income taxes on those earning $1 million or more.” Fifty-nine percent expressed strong support, 16 percent support, 7 percent opposition, 10 percent strong opposition, and the final 9 percent were unsure.
So why is the surtax off the table? Constitutional amendments are always hard to pass because they require super-majority support. Even with a commanding 70-47 edge in seats, Madigan could pass the bill only with universal support in his own Democratic caucus. Perhaps because he often ignores or bullies the Republican minority, he could not lure any of them to his side to make up for a few tax-shy Democrats.
A more complicated answer is that the surtax might never have been anything more than a red herring, floated to generate headlines, to force ultra-wealthy Republican gubernatorial candidate Bruce Rauner to take a position that can be held against him in the campaign, and maybe to provide something for vulnerable Democrats to oppose, so that they could brag of their independence from Madigan.
A still more interesting explanation is that the public’s appetite for raising taxes on the rich could be weaker than those poll results suggest. Two-thirds of those same survey respondents, when asked to estimate the federal income taxes paid by those making a million dollars a year, gave answers at least 10 percent below the actual effective rate, which is about 25 percent, according to IRS data. So the broad support for making the rich pay more rests partly on underestimation of how much they currently pay.
What sorts of average tax rates do Americans regard as fair? In a February 2012 YouGov national survey, respondents were asked to select fair income tax levels for hypothetical taxpayers with incomes ranging between $20,000 and $1 million. About 80 percent of respondents chose fair tax rates for millionaires that were lower than the current average tax rate paid by those with that level of income. Predictably, responses varied by self-reported ideology: conservatives like lower rates than moderates, who like lower rates than liberals. Strikingly, though, only those who self-identified as “very liberal” chose an average fair effective tax rate as high the current status quo for the millionaires. In this sense, most of the public regards the actual tax burden of the very wealthy as too high, not too low.
Gov. Pat Quinn, Madigan and Senate President John Cullerton have now committed to making permanent the previously temporary increase in the state’s income tax to 5 percent. The complexity of the tax code makes it a bit difficult to say exactly what overall income tax rates would have been paid by Illinois millionaires given current federal rates plus an 8 percent state rate. But likely scenarios for the resulting tax burden on the very wealthy put it higher than the levels chosen as fair by many Democrats, most independents, and nearly all Republicans.
Of course, Illinois remains in very bad fiscal shape. To get out of this hole (or merely to stop digging it deeper), the state government must both generate additional revenue and reduce spending. A lesson of the millionaire’s surtax — if it was ever more than a sleight of hand — could be that constitutional amendments are an unlikely tool, even with historically large Democratic majorities in both chambers of the General Assembly and a Democratic governor. A second lesson is that survey data on what policies are favored by the public are useful, but limited. Legislative gamesmanship can make the motives and preferences of leaders hard to fathom. Public opinion on taxes and spending is also deceptively complicated and multi-faceted, and thus open to misinterpretation.
This commentary is part of the Illinois Budget Policy Toolbox. Learn more at igpa.uillinois.edu/budget-toolbox.