Sunday, 29 Nov 2020

Opinion | Say Yes to Progressive Taxation

Most Americans accept the common-sense case for progressive taxation: Those who have more ought to contribute more to the society that is the foundation of their prosperity.

In most American states, however, the distribution of taxation is actually regressive. Those who earn less money pay a higher share of income than the rich in state and local taxes.

Voters in Illinois and Arizona, two of the states where taxation is most regressive, now have the chance to make the tax system a little more fair. Ballot measures in both states would shift more of the burden of taxation onto wealthier residents. In California, where the overall distribution of taxation is already progressive, voters can make a change for the better.

A more progressive approach to taxation is necessary to counterbalance the rise of economic inequality, which has reached the highest levels since the 1920s. This imbalance undermines the nation’s foundational commitment to the equality of opportunity, weighs on economic growth and exacerbates political tensions.

Federal taxation requires the biggest overhaul. The federal government collects about two-thirds of the taxes that Americans pay, and the distribution of that burden has become significantly less progressive in recent decades, including as a result of President Trump’s 2017 tax cut.

But state and local tax policies are ripe for change, too.

The biggest reform is on the ballot in Illinois, where voters have the opportunity to replace a flat tax on income with a progressive tax that would impose a larger burden on those with larger incomes. The federal government and 32 states impose progressive income taxes.

Gov. J.B. Pritzker, one of the state’s wealthiest residents, campaigned on the promise of a tax overhaul in 2018. Illinois currently taxes income at a flat rate of 4.95 percent. The Illinois legislature has passed a new set of tax rates that would take effect beginning next year, if voters approve Mr. Pritzker’s plan. Most Illinois households would get a modest tax cut. The first $10,000 in income would be taxed at 4.75 percent; the next $90,000 would be taxed at 4.90 percent; and income between $100,000 and $250,000 would be taxed at the current rate.

The big change is for income above $250,000, which would be taxed at rates of up to 7.99 percent. Also, individuals with income above $750,000, or couples with income above $1 million, would pay the top 7.99 percent rate on all income, including the first $250,000.

Opponents are blowing on all the familiar horns. They say that Illinois should cut spending rather than raising taxes, that the rich will flee, that investment will wither. They say taxing the wealthy will end up punishing those who have less. The truth is that the level of taxation matters less than how the money is used. People flock to high-tax jurisdictions that provide services and amenities and, in those places, commerce thrives. Illinois, long plagued by fiscal mismanagement, undoubtedly has work to do on the spending side of the ledger. But that’s no argument against progressive taxation as the best way to raise the money it does need.

In Arizona, the distribution of taxation is almost as regressive as in Illinois, and the state’s public schools are chronically underfunded. State residents can address both problems by voting for Proposition 208, which would raise money for schools by imposing a 3.5 percent surtax on income above $250,000 or, for joint filers, on household income above $500,000.

Even if both measures pass, the overall burden of taxation in Illinois and Arizona would remain regressive; sales and property taxes fall disproportionately on lower-income households because the wealthy tend to consume a smaller share of income. Only a handful of states have crafted tax systems that collect a larger share of income from the wealthy.

California is at the top of that list, according to the Institute on Taxation and Economic Policy. But there is room for improvement. For the last four decades, property taxation in California has been constrained by Proposition 13, the seminal anti-tax ballot initiative passed in 1978. The measure limits property taxation in California to 1 percent of the purchase price plus modest inflation adjustments. As a result, the state does not benefit from appreciation unless a property changes hands — a system that favors older homeowners and wealthy landlords.

The new ballot initiative, Proposition 15, is a strategic effort to chip away at those debilitating constraints without angering homeowners. It would lift Prop 13’s protection for commercial and industrial property — but not apartment buildings — valued at more than $3 million, allowing local governments and schools to raise as much as $11.5 billion in new annual revenue.

The bill is designed to minimize the pain for small businesses. More than 90 percent of the new tax revenue is projected to come from the likes of Disneyland, Chevron and the Irvine Company, which owns much of Orange County. Opponents warn that corporations will try to pass the cost to customers, but it’s hard to see how Chevron can raise prices unilaterally.

All three state measures signal a welcome shift in public debate. Decades of relentless advocacy for limits on taxation have left states strapped for resources and forced to lean heavily on lower-income households. A new generation of politicians is now stepping forward to make the case for progressive taxation, promising to use the money to invest in services like high-quality education. It is up to the voters to give that effort their support.

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