Graduated Income Tax Referendum Fails, Dealing Major Blow To Pritzker

Nov 4, 2020

Credit Hannah Meisel/NPR Illinois

Illinois voters rejected Gov. JB Pritzker’s signature plan to change Illinois’ flat-rate income tax system to a graduated income tax on Tuesday, delivering a major blow to the first-term Democrat as vote totals showed an insurmountable lead in "no" votes Wednesday, even with up to 400,000 mail-in ballots still left to be counted in Illinois.

 

After spending nearly four years pushing for the issue first as a candidate and then as governor — and spending millions of his own wealth — Pritzker is left with few options to with another difficult budget year looming and the COVID-19 pandemic and accompanying recession nowhere near over.

During a news conference Wednesday afternoon, Pritzker blamed the graduated tax's failure on “billionaires and special interests” who fought against his plan.    

"There will be cuts and they will be painful," Pritzker said. "And the worst part is, the same billionaires who lied to you about the fair tax are more than happy to hurt our public schools, shake the foundations of our cities and diminish our state.”

For the constitutional amendment to pass, it needed 60% of the vote, or a simple majority of yes votes among all ballots cast. The graduated income tax measure got neither, with about 45% of voters casting ballots in favor of the measure, according to unofficial election totals.

 

Groups pushing the graduated tax plan conceded on Wednesday morning, ending Pritzker's expensive and multi-year campaign for the issue.

In his inaugural address in January 2019, Pritzker declared: “The future of Illinois depends on the passage of a fair income tax.”

But now that future looks much less certain.

 

Pandemic economy

 

Long before COVID-19 hit Illinois in March, Illinois has had a structural deficit that’s ballooned year after year. A year prior, Pritzker proposed actual graduated income tax rates to go along with his long-promised “Fair Tax” constitutional amendment plan, and promised that once fully implemented, Illinois would realize an extra $3.4 billion annually, all while only raising taxes on the wealthiest 3% of taxpayers.

 

But in an economy ravaged by the pandemic, Pritzker’s office has estimated the state could lose out on $6.5 billion in revenues in the current fiscal year, which began July 1. The legislature authorized up to $5 billion in borrowing from the a COVID-19 loan program created by Federal Reserve this spring, but $1.2 billion of that spending authority was already used to plug a budget hole for the fiscal year that ended June 30. 

 

More federal help for state governments is still uncertain, at least until the presidential election is settled. 

 

Pritzker this week warned that he and the Democratic supermajorities that control the legislature would be forced to consider raising taxes across the board to deal with Illinois’ significant structural budget deficit, or brace for significant budget cuts.

 

“The cuts, though, just to be clear: 15% cuts in public safety dollars, education dollars, in the dollars necessary for human services exactly at a moment when people need these things most,” Pritzker said hours before polls closed Tuesday. 

 

Both major budget cuts or an income tax hike, however, are extremely difficult and politically risky. Deep cuts to some areas like social services would be impossible due to long-standing consent decrees and court orders, and much of the state’s $41 billion budget is taken up by legally obligated payments like school and Medicaid funding, pension contributions and debt service — aka the interest on loans Illinois has taken out over the years. 

 

The libertarian-leaning Illinois Policy Institute on Wednesday, which had a hand in organizing thousands of Illinoisans online to mobilize against the graduated tax since early last year, used its election night statement declaring victory to also point in the direction of a constitutional amendment to address Illinois’ ballooning unpaid pension obligations. 

 

After the Illinois Supreme Court in 2015 threw out a bipartisan 2013 attempt to change Illinois’ public employee pension systems to save the state billions over time, conservatives have turned their attention toward moving public support for getting rid of the pension protection clause in Illinois’ 1970 constitution — the same constitution graduated income tax proponents said was standing in the way of fiscal stability for Illinois.

 

Lt. Gov. Juliana Stratton made waves earlier this fall when she said during a virtual Fair Tax rally that if the graduated income tax ballot measure failed, a 20% across-the-board tax hike would be on the table.

 

“We all know that our middle- and lower-income families cannot withstand a 20% tax increase, and it will only serve to deepen the dramatic inequities that we already see across the state,” Stratton said in September. “It will drive out our residents and it will drive out investment in Illinois.”

 

Illinois has barely begun recovering from the two years it went without a budget — but kept spending money — during Gov. Bruce Rauner’s term in office. During the impasse between 2015 and 2017, New York bond houses lowered Illinois’ credit ratings on its general obligation bonds, which have stayed just one notch above junk status for more than three years.

Those credit ratings agencies have said in recent months that the passage of the graduated income tax could improve Illinois’ creditworthiness in the years to come. However, according to reporting from Bond Buyer, the state could be downgraded to non-investment grade “junk” status if the graduated tax ultimately fails.

 

Opponents spent big to sow doubt

 

Pritzker put $58 million into the campaign for his Fair Tax, funneling his personal wealth to a 501(c)4 and corresponding ballot initiative committee founded by his deputy campaign manager, Quentin Fulks. 

 

But opponents to the tax graduated income tax amendment also spent big. Republican mega donor Ken Griffin, founder and CEO of Chicago-based hedge fund Citadel, gave $54 million to the Coalition to Stop the Proposed Tax Hike Amendment.

 

That group, along with other industry organizations, held voter forums, ran advertisements and were ultimately able to spread the message that voters “cannot trust Springfield politicians with another tax hike,” crowed a statement late Tuesday evening from the Coalition to Stop the Proposed Tax Hike Amendment. 

 

That messaging, which also at times tied the tax amendment to the deeply unpopular longtime House Speaker Mike Madigan (D-Chicago), ran into a confluence of factors that made its success more likely, including a decades-long trend of eroding trust in Springfield, according to Gallup.

 

Illinois voters actually approve of the concept of a graduated income tax — at least in theory. Its popularity has been borne out consistently in surveys and polls for the last few years; A survey conducted last fall by NPR Illinois and the University of Illinois at Springfield found 67% support for the concept of a graduated income tax.

 

 

Credit NPR Illinois / NPR Illinois

 

But opponents of the graduated tax measure used a distrust of state government to their advantage, pointing out that the legislature had voted to raise income taxes twice in the last decade, without getting into the nuance of the first tax hike rolling back after four years, and the second hike increasing individual income taxes to slightly below the first hike. Vague references to fiscal mismanagement and corruption also may have tipped the scales.

 

With mere weeks to go in the campaign, the Illinois Policy Institute filed a lawsuit claiming that passing the graduated income tax amendment would open the door to taxing retirement income in Illinois — a third rail in Springfield. Pritzker has repeatedly said he does not support taxing retirement income, but an errant comment from Democratic Treasurer Mike Frerichs this summer about looking at the issue if the graduated tax were passed showed up in the group’s complaint, which filed it along with Cook County seniors.

 

Though the lawsuit went nowhere before Election Day, it generated plenty of earned media, which completed the feedback loop of messaging when it became part of a TV ad.

 

 

Those strategies seem to have borne out. According to an exit survey of nearly 1,700 Illinoisans who voted early in October, nearly 55% who voted against the graduated tax amendment said they did so because they distrusted Springfield politicians, according to data provided to NPR Illinois by the Illinois Policy Institute. The second-most common reason for voting agains the amendment — with 22% of survey respondents citing it — was the fear that it would open the door to taxing retirement income.

Illinois Chamber of Commerce President and CEO Todd Maisch said voters didn't buy the graduated income tax proponents' promise that only high-income earners would continue to pay a higher share of income taxes over time.

"I think everybody does understand that the middle class — it was just a matter of time before they would be targeted," Maisch said.

Coalition to Stop the Proposed Tax Hike Amendment spokeswoman Lissa Druss said the same.

"Our message was built around one central theme: trust," Druss said in a statement Wednesday. "And at the end of the day, the voters knew we simply could not entrust the Springfield politicians with another blank check."

This post has been updated several times.