Feds use ‘fair tax’ methods, but Pritzker doesn’t like results

Despite pushing hard for a progressive state income tax, Gov. J.B. Pritzker criticized the impact of the same policy at the national level for what it means for Illinois.

During his joint State of the State and budget address on Feb. 17, Gov. J.B. Pritzker had some harsh words for how money from the federal government is collected and then doled out.

“Every Illinoisan should hear this. For decades, Illinois has been forced to send billions more tax dollars every year to the federal government than we receive back from them in support of our citizens. Federal spending is rigged against Illinois. We’ve been subsidizing public services for other states, like Iowa, Kentucky, Indiana, and Missouri,” Pritzker said.

First, his claim is no longer true.

Second, Pritzker spent $56.5 million of his own money on a failed campaign to convince Illinois voters to adopt a progressive state income tax. His complaint about Illinois not getting its fair share is because the federal tax system is a progressive tax system that is doing exactly what it was designed to do – take more from those who have more.

Historically, Illinoisans did send more money to the federal government than they received. That stopped being the case in 2018, when Illinois began receiving more money in federal expenditures than it contributed in national receipts. In 2019, Illinois received $1.03 in exchange for each $1 it sent to Washington, D.C.

The shift is likely because more of the state’s residents collected Social Security as the population aged. Illinois’ sluggish economy was likely a factor as well, which means Illinois earned less so it pays less in federal taxes.

Because the most significant forms of revenue for the federal government are personal income and employment taxes, which make up 90% of federal revenue available to be allocated, states with above average incomes foot a greater share of the tax bill.

In 2019, Illinoisans paid $5,928 per capita in income taxes. That is $767 more than the national average of $5,161 per person. Because Illinoisans pay more to the federal government to start, they have farther to go to receive their fair share in relation to other states.

But it made the transition from net loser to net gainer in 2018, although it still pays more than the national average. Only eight states are currently net losers.

There’s not much to be done about how federal expenditures are dispersed throughout states, and there might not even be much of a basic “fairness” claim that Pritzker is trying to appeal to. That’s because a large portion of the spending at the federal level is dispersed via direct payments to individuals through programs such as Medicare and Social Security. The states where participants receive those benefits isn’t necessarily where they paid into the systems.

Money that isn’t in the form of direct payments is often allocated according to state population figures or based on means testing. Much of the money is distributed evenly based on population or targeted specifically for those most likely to need aid.

Lastly, federal employees, whose wages count as expenditures, are not evenly dispersed throughout states, particularly in states with large military bases. That contributes to perceived differences in federal spending throughout states.

The problem Pritzker is attempting to highlight – albeit incorrectly – is almost entirely because of how revenue is generated at the federal level. There isn’t much that can be done to remedy disproportionate federal spending among states without abandoning means-based spending, forcing those who receive payments from the federal government to stay in the states where they paid into the system, or distributing federal employees among states based on population.

Pritzker’s distress over Illinois getting its fair share is mostly thanks to the federal progressive income tax, a policy he failed to convince Illinois voters was a “fair tax.” What voters recognized was that it as was a scheme to squeeze another $3.4 billion from the state’s economy each year, damage its small businesses and open a path to taxing retirement income.

Pritzker’s intention was never to create a “fair” system to help the needy. He wanted to maximize revenue for a state government that is progressively failing to fund its public pension liabilities and needs to curb future pension growth through a constitutional amendment.