Fair Tax - FAQ

Aug 25

By Ari Frede

1. Can you explain what’s wrong with the current tax system? Doesn’t it apply the same tax rate to everyone equally?

It does apply the same 4% tax rate to everyone equally, which sounds fair at first. But the other taxes residents pay, like sales and property taxes, are NOT EQUITABLE. So, combined together, all these taxes make it cost more to be poor in Illinois. The bottom 20% of Illinois’ income earners have TWICE the combined tax burden as the top 1%. Changing this constitutional amendment, which only came about in the 1970s, would help ensure the millionaires and billionaires in our state pay their fair share.

2. Isn’t the Fair Tax the same as the Federal income tax?

Yes, it is! The formula is different, but the Fair Tax is based on models also known as graduated taxes, progressive taxes, or marginal taxes. The “margins” are the different amounts of income that are each assigned their own tax rate.

Another way of thinking about this is that without a Fair Tax, people with high income are getting the same state services while paying LESS than everyone else.

3. How will the Fair Tax affect small businesses?

In the new formula, the corporate tax rate changes from 7% to 7.99%. But relatively few businesses in Illinois pay taxes under this rate. Most businesses pay taxes under the individual rate.

In the past decade, the federal tax code allowed partnerships, sole proprietorships, and Subchapter S corporations to “pass through” their net income to be claimed by individual owners on their individual tax returns. That accounts for 99% of Illinois businesses. Illinois tax law closely follows the federal tax rules.

If Fair Tax passes, 97% of small businesses will see no increase in their income taxes, and some will see decreases. Big corporations paying taxes as C corporations will see an increase of not quite 1% in their flat rate.

CTBA article answering how Fair Tax will affect small businesses: https://budgetblog.ctbaonline.org/small-businesses-wont-suffer-because-of-the-fair-tax-9195c361324

4. I’m against this because politicians are just going to use it to raise taxes... (i.e., against the middle class; past what I can afford; to benefit themselves…)

I hear you. Except politicians have ALWAYS retained the right to raise taxes. They just didn’t have access to change the rates between income levels because of the Illinois Constitution. They control taxes in order to balance the budget, so they can pay for all the state services we need and enjoy. But for too long, this regressive tax made us all pay the same rate. The Fair Tax will help ensure that those who can afford it the most pay back into the society they profit from.

5. I’m against this because raising taxes on the wealthy will drive those residents out of the state.

That’s been a common counterargument, but the truth is that didn’t happen in places like New York or California when a similar tax was passed.

However, there is evidence in Illinois that when tax rates went up, lower-income folks left the state. Without the Fair Tax, the government may have to raise the flat tax rate, and the burden will fall to everyone who stays here.

6. I’m against this because I believe we should get to keep all the income we earn.

OK, this is a little more complicated. Having NO taxes is a little extreme for us, because we’re in favor of government services. If you think some taxation is OK, then some part of Fair Tax is OK. And if you think that people should pay according to what they can afford, then you probably agree with more of Fair Tax than you might think.

There are two parts to Fair Tax:

The first part is the only thing this referendum does. It deletes the language from the Illinois Constitution that commands a flat percentage rate applied to all Illinoisans -- our regressive tax structure. It’s only 43 words and written in plain English.

Proposed constitutional amendment (look for strikethrough lines at beginning): https://www.ilga.gov/legislation/101/SJRCA/PDF/10100SC0001lv.pdf

The second part is that if it passes, it will put into action a law already approved pending this referendum. This formula was already passed by Illinois’ Congress and Governor Pritzker approves it.

If you agree somewhat with the first two points above, but disagree with the proposed formula, then help us pass this first because we might not get another chance. Then let’s advocate for a better formula and responsible spending. This is how budgets work. We are always in favor of improvements, and Fair Tax is an improvement. It’s also a crucial foundational piece - we won’t be able to make other changes unless we change the Constitution.

7. Are you aware that the other states with graduated taxes have different rates than this one?

Yes, that’s an important thing to understand. Remember that a regressive tax and a graduated tax are not binary -- they’re on a spectrum, not an either/or option. The more regressive a tax is, the more it uses a single uniform tax from everyone. The more graduated a tax is, the more people pay individualized rates that suit individual situations equitably.

When you look at other states’ tax structures, you may see differences with Illinois’ structure:

“Steps” of taxation -- how many levels of income are taxed
Thresholds of income for each tax rate
Tax rates

Government’s main source of income is taxes. Since they control taxes, they set each of these variables (and more) according to their own situation. Many hands help shape the budget, so add yours to them.

8. Why should we pass the Fair Tax since it won’t raise enough money to fix the issues in our state budget, especially with pensions?

The reality is that Illinois is in a lot of debt and it will take more than the Fair Tax to get the state back to financial wellness. There are other issues, such as pension reform, that also call for examination. That being said, passing a Fair Tax is a reality at this very moment and we shouldn’t waste this opportunity to bring equity into Illinois’ taxation system and raise needed revenue. The time is now to make a change when it comes to state income taxes.

9. How can we trust politicians to handle the revenue from Fair Tax?

The budget has always been in politicians’ hands, as has been their ability to raise taxes. Illinois has pretty low trust in our politicians’ ethics, but this constitutional amendment only deletes the 44 words from our Constitution that require a flat tax. There is no greater risk of political mismanagement than before. In fact, they have already passed the tax formula they will use if the Fair Tax referendum passes.

Services are funded because of politicians, not despite them. The state only has two levers they can control: Reduce expenses or raise revenue (i.e., taxes). If someone told you Illinois is spending too much, think again. Ralph Martire at the CTBA found Illinois’ expenses have been declining, even when figuring in cost of living increases. “...[M]any commentators and editorial boards still try to blame the state’s historic, recurring deficit problems on overspending for services. The data, however, have simply never supported that canard...” (Aug 19, 2020)

We’re not spending too much, we’re not raising enough. Now we recognize that we have underfunded services and schools, and don’t have enough revenue to do it right. Fair Tax won’t fix it all, but it will help.

Our state needs the funds raised from Fair Tax to fund crucial services. This means we maintain a fundamental level of trust in state government to use this revenue responsibly. If you don’t like what’s going on in government, get in touch with your Alderman, Representative, Senator, or Governor and let them know. Then use the power of your vote and your voice.

10. I don’t understand the slide that shows that the lowest 20% of earners pay twice the tax than the top 1%. Can you explain how that’s possible if everyone is paying 4%?

You are right! If our income tax was based on the same rate for everyone, it would be closer to progressive. However, when combined with Illinois’ other taxes, like sales tax and property tax, the tax rates are clearly inequitable. This is why we repeat that it costs more to be poor in Illinois, and that is unfair. The bar graphs you saw show the total tax burden, not just the income tax. The Fair Tax solution balances out the inequity of the other taxes in combination.

Further, the Fair Tax solution would still be fair if the other tax burdens were corrected. The Fair Tax is simply a graduated tax, which is the same way 32 other states and the Federal government calculate taxes. It doesn’t mean wringing unfair amounts from the wealthy; it means everyone paying a fair amount and keeping a fair amount. People have been using similar calculations for millennia because it’s a fair solution.

11. The Fair Tax calculator doesn’t totally match up with the slide show. What’s going on?

The Fair Tax calculator was put together by a non-profit, not the government. It’s also very simplified, so it is not 100% accurate and not a guarantee. It doesn’t capture as many variables as your actual tax form, but it still shows a decent estimate of what your taxed income would look like under the new formula.

12. Can you explain again what it’s going to take to pass this referendum?

Sure! If EITHER of these two thresholds are met, the referendum will pass.

50% + 1 of everyone who turns in a ballot, regardless of their answer to the referendum
- Example: 1 single yes vote; no other referendum answers from any other voters
60% + 1 of everyone who answers the referendum question
- Example: 61 yes votes; 100 total answers to the referendum from other voters

13. What were those resources shared in the presentation?

Verify Fair Tax

You can try out the Fair Tax calculator yourself at https://www2.illinois.gov/sites/gov/fairtax/Pages/default.aspx

Tax structure legislation, historically and with new lines underlined: https://www.ilga.gov/legislation/publicacts/101/101-0008.htm

Proposed constitutional amendment (look for strikethrough lines at beginning): https://www.ilga.gov/legislation/101/SJRCA/PDF/10100SC0001lv.pdf

Yes For Fair Tax’s document of the actual ballot language: https://www.yesforfairtax.org/blog/ballot-language/

The authentic government online record of the same language: https://ilga.gov/legislation/fulltext.asp?DocName=&SessionId=109&GA=101&DocTypeId=SJR&DocNum=1&GAID=15&LegID=126926&SpecSess=1&Session=1

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