Constitutions Matter for Tax Rates

By David R. Henderson, Hoover Institution at Stanford University
 
If you read much about taxes and spending in the state of Illinois, you know that the state’s in a world of hurt. The state government has dramatically underfunded its pension system for state government workers. Sometime in the next decade, the government will likely need to rein in state pensions, cut the growth of other spending to come up with funds to finance those pensions, or raise taxes.
 
I’m sure the state’s elected officials will consider all of those options in the future. But fortunately, there is one major barrier to raising taxes: the Illinois state Constitution.
 
The Illinois legislature can certainly vote to raise tax rates on income. But what it can’t do is vote to raise income tax rates on some people and not others. The reason: Illinois has a flat tax rate of 4.95 percent on all individual income and a flat tax rate of 9.5 percent on all corporate income.
 
Economists have often pointed out that having a flat tax rate reduces the amount of energy people put into moving income from one year to another to minimize their tax obligation.
 
But that’s not the only advantage. The other major advantage is that it makes a legislature think twice, or at least once, before imposing higher tax rates. The legislators know that what’s sauce for the high-income goose is also sauce for the low-income gander. Most people don’t like having their taxes raised, but many people don’t object to having other people’s taxes raised. The requirement for a flat tax rate on individual and corporate income means that people who support raising taxes on others know that they will also end up being taxed more.
 
That’s where a constitution comes in awfully handy. Under the Illinois Constitution, all individuals must pay the same rate on their individual income and all corporations must pay the same rate on their corporate income.
 
A lot of the politicians in Illinois, mainly Democratic politicians, don’t like this. So they have tried to change the Constitution. But they have been unable to do so.
 
The latest attempt was in 2020, when Governor Pritzker pushed for an amendment to the Constitution that would have allowed higher tax rates. He wanted a top tax rate of 7.99 percent for high-income people — a 61 percent increase. But 55 percent of Illinois voters said NO. That’s a bigger victory than it seems because the change to the Constitution required a vote of 60 percent in favor. So the measure failed by 15 percentage points.
 
Well-written constitutions matter. If a constitution can constrain greedy Illinois politicians, a similar constitution can constrain politicians in other states also.

Today's TaxByte was written by David R. Henderson, a research fellow with the Hoover Institution at Stanford University.