Individual Income Tax Insights: Individual Income Taxes, Unlike the World, Can Be Flat

Budgeting can be tough. Whether you are a recent graduate out on your own for the first time or a person who has been in the workforce for years, coming up with a budget and sticking to it isn’t always the easiest thing. If you don’t believe me, just ask Illinois -- a state that has been working to finalize its budget for almost a year.

Illinois’s individual income tax is seen by some as the antidote to what ails the state’s budget, reports the Herald & Review. A recently proposed constitutional amendment (H.J.R.C.A 59), and accompanying legislation (H.B. 689), aimed to turn Illinois’s flat tax rate of 3.75 percent into a graduated rate, the article states.

Unlike a flat tax which taxes all income at one rate, a graduated tax system taxes income at differing rates depending on how much an individual earns. This means that theoretically an individual who makes $1 million a year will be taxed at a higher rate than an individual making $10,000.

Only about 1/5 of the states that impose an individual income tax use a flat rate, with the vast majority instead electing to tax individuals on a graduated scale, the article noted. Supporters of this proposed change to Illinois’s taxing system argue it would have led to quite the increase in annual revenue, according to the article.

Illinois is not alone in looking at individual income taxes as a way to deal with money issues. Recently Alaska Governor Bill Walker, facing a budget deficit, has proposed to institute an individual income tax for the first time in decades. Alas, where Alaska’s income tax debate is still ongoing, albeit barely, it appears as though Illinois’s has ended.

Having not been able to garner the necessary votes by May 4 to put H.J.R.C.A 59 on the next election ballot, the proposed amendment and legislation have fallen by the wayside, as reported by Michael J. Bologna in Bloomberg BNA’s Weekly State Tax Report. Questions regarding the state’s competitiveness for businesses may have played a factor in the amendments failure to make it out of the legislature, the article stated.

As Illinois sticks with its flat tax, the state will need to continue looking for other possible solutions to resolve their budget.

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Should Illinois adopt a graduated tax system?

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