In Illinois, There Is No Budget Crisis: There Is a Regressive Taxation Crisis

Sad to say, nothing they’re doing or talking about in the General Assembly will have a significant impact on the state’s chronic budget crisis.

Not draconian Medicaid cuts, not possible pension cuts or casino expansions. The legislature is barking up the wrong trees, and doing it over and over.

That’s because the state doesn’t have a spending problem. In real terms, Illinois has been steadily cutting spending on education, human services, health care, and public safety for the past decade. Medicaid is not the problem: general revenue funds going to Medicaid are down over the past five years.

According to Ron Baiman of the Center for Tax and Budget Accountability, Illinois is one of the nation’s wealthier states, looking at the state’s gross domestic product per capita. But it has been one of the nation’s lowest-spending states, looking at state spending as a percentage of GDP.

So the problem isn’t overspending, and cutting doesn’t get us closer to a solution. The problem is a regressive tax system that doesn’t tax where the money is.

Regressive

Illinois has one of the most regressive tax structures in the nation. As noted here last year, the bottom 20 percent of households pays twice as much of their income in state and local taxes as the top 20 percent does.

Even the flat income tax is regressive, since it imports all the federal tax code’s loopholes; of the current nominal rate of 5 percent, households earning over $1 million a year pay an effective tax rate of just 2.1 percent – the same as households earning over $10,000. The squeeze is on the middle.

And especially with the surge of income inequality in recent decades, that means the state asks more and more from people who are doing less and less well, and fails to capture the gains of economic growth, which are increasingly found at the top.

It can’t go on forever. At some point Illinois leaders are going to realize there’s no alternative to a progressive income tax. The constitution, which mandates a flat tax, will have to be amended.

All our neighboring states have progressive systems – and that’s the reason their budget problems are so much less than ours. If we took Iowa’s income tax rates and applied them to Illinois’s tax base, we’d raise $6 billion more a year – and 54 percent of taxpayers would get a tax cut averaging 24 percent, according to CTBA. If we took Wisconsin’s we’d raise $3.6 billion more a year and cut taxes for more than half our residents.

Tax cut

The Illinois constitutional amendment will have a straightforward appeal: nearly all taxpayers’ rates will go down.

CTBA has fashioned a proposal for a progressive tax system for Illinois that raises an additional $2.4 billion yearly (even after allowing for increased tax avoidance by wealthy taxpayers) and reduces the tax rate for 94 percent of taxpayers.

Everyone earning under $150,000 would get a tax cut. Starting to sound good?

It’s not even very tough on the wealthy; CTBA figures the effective tax rate (after deductions, credits and offsets) would top out at 6.3 percent for those earning over a half million a year.

There’s other money the legislature is leaving on the table, as it cuts public services to the bone. A restructuring of the corporate income tax in 2001 – an unsuccessful attempt to encourage job growth — means most Illinois corporations pay no income taxes.

And an antiquated sales tax which applies to goods but not services – so if you buy a lawnmower and gas to mow your own lawn, you pay a sales tax, but if you hire a lawn service you don’t – costs the state between $500 million and $1 billion a year.

Corporate welfare

Then there’s corporate welfare – an area in which Illinois is a leader. The Responsible Budget Coalition identified six corporate tax loopholes which don’t make economic sense — and where Illinois departs from federal policies and practices in other states — costing Illinois nearly $700 million a year.

These include a deduction for dividends paid by foreign corporations to parent corporations here ($386 million a year) and a domestic production credit, which reduces corporate tax bills here for production in other states ($200 million).

Then there’s a $75 million tax break for oil companies because, unlike the federal government, Illinois defines the outer continental shelf as outside the national boundaries.

On top of RBC’s proposals, CTBA and others have highlighted the accelerated depreciation allowance, a federal provision that other states have decoupled from. It costs over Illinois $300 million a year (more here).

Altogether that’s well over a billion dollars, maybe two billion, maybe more, that the General Assembly has left untouched, apparently preferring to throw sick children out into the street.

“Everybody’s talking about how this was such a hard, courageous vote,” said Lynda DeLaforgue of Citizen Action Illinois after the $1.6 billion Medicaid cut was passed. “Wouldn’t it have been more courageous if they had taken on the oil companies?”

Medicaid

That $1.6 billion isn’t the final figure, since kids from 26,000 families thrown off Family Care – and thousands of individuals to be thrown off Medicaid — will cost more when they end up in emergency rooms.

And the $17 million cut from home health care will cost the state more when people with disabilities are forced into nursing homes.

“You’re going to end up spending any money you save,” said Gary Arnold of Access Living. “It’s very shortsighted.”

The elimination of Illinois Cares RX drops prescription coverage for 160,000 low-income seniors and people with disabilities. “This sudden and extreme elimination of benefits for a very vulnerable population will most surely put peoples’ lives and health at risk,” according to Citizen Action Illinois.

The group is among several asking Governor Quinn to restore the funding – or at least to postpone elimination of the program, now set for July 1, until next January to allow providers to help identify options and potentially save lives.

Pensions

There was no pension deal, to the chagrin of many mainstream commentators. Here, too, there are legal obstacles. The deal under consideration – which would require public workers who’ve paid for their pensions to bear the burden of politicians’ profligacy — would seem on its face to violate constitutional protections of state employees’ pension rights.

Quinn wants to push on, but the matter is more likely to be addressed in the veto session, after the November election.

Through extensive grassroots pressure, public workers succeeded in countering some of the biggest myths around the pension crisis, said Anders Lindall of AFSCME Council 31. Chief among these is the notion that exorbitant public employee pensions are driving the budget crisis.

In fact most public workers’ pensions are modest – they average $32,000 a year, and 80 percent of state workers don’t get Social Security. That’s after contributing 8 to 10 percent of each paycheck to their pension.

“You don’t hear anything about ‘gold-plated pensions’ anymore,” said Lindall. “More and more people understand it was the politicians who caused the problem.” They caused it by using pension funds as a credit card to paper over an inadequate revenue system, he said.

It turns out the revenue crisis — the regressive tax system — is driving the pension shortfall.

Public worker unions in the We Are One Illinois coalition have worked with legislators, offering ideas toward a solution “that’s fair to workers who have paid their share and puts the retirement system on a strong footing in a sustainable way,” said Lindall.

Public workers “recognize the scale of the shortfall and are willing to be part of a solution,” he said. “No one has a greater stake in securing the future of the retirement system.”

One of their demands is “an ironclad guarantee that pension fund contributions can’t be skipped or shorted,” he said.

Governor Quinn said he’ll meet with legislative leaders to keep pressing for a resolution. Public workers unions hope they’ll be included in the process, Lindall said.

That might save on lawyers’ bills down the road.

Casinos

The GA passed a casino expansion bill, but it contains features (including slots at racetracks and gaps in oversight) that led Governor Quinn to veto a similar bill a year ago. It could end up part of the horse-trading in the fall veto session.

If it does come to pass, expect the benefits in terms of jobs and public revenues to fall short of what’s being promised now, said Doug Dobmeyer of the Task Force to Oppose Gambling in Chicago. “Proponents always lie about the benefits,” he said.

What we do know is that gambling takes money out of the consumer economy. A Chicago casino with 4,000 slot machines, each taking in $100,000 a year, would remove $400 million from the consumer economy, U. of I. Professor John W. Kindt explained last year (see Slot Machines Kill Jobs for more). That’s a heavy blow to a struggling economy – and a lot of lost sales tax revenue.

And the money the state takes in comes, by and large, from moderate-income people. Like the new cigarette tax, like the speed cameras and higher water bills, it’s just one more grab for revenue from people who are struggling, by politicians who can’t see past the next election.