After much debate, Illinois Governor Pat Quinn signed a budget last week. Despite Governor Quinn initially advocating for an income tax increase to help balance the state's $11.6 billion shortfall, the budget that passed didn't include a tax hike and instead relied heavily on borrowing, delaying payment to vendors and spending cuts. The Senate voted 45-10 for the key funding piece of the budget, while the House supported it 90-22. Despite this disappointing news, Senate President John Cullerton has said that his "primary purpose" starting next year is an overhaul of the state's tax structure. Here's hoping Senator Cullerton gets some inspiration from ITEP's recent report: Ready, Set, Reform: How the Income Tax Can Help Make the Illinois Tax System Fairer and More Sustainable.
Recently in Illinois Category
Tax reform hopes in Illinois were crushed (at least temporarily) on Sunday when the state House of Representatives rejected Governor Pat Quinn's proposal to increase the state income tax from 3 to 4.5 percent and the corporate tax from 4.8 to 5 percent in order to avoid a $7 billion budget cut. The 42-74 vote came a day after Senate Democrats led passage of a measure that would raise personal income taxes, boost the income tax from 3 to 5 percent and impose $1 billion in sales tax for the first time on many services. The House opted not to vote on the measure passed by the Senate.
Facing a midnight deadline, Illinois lawmakers instead passed a makeshift spending plan that provides for only 50 percent of the funding for state agencies laid out in Quinn's original budget and is not expected to last much more than 6 months. On Wednesday, State Senate President John Cullerton used a parliamentary maneuver to block the budget and hold it in the Senate. The action was considered mostly symbolic since Governor Quinn claims he won't sign the budget anyway because it does not solve the deficit problem.
Governor Quinn has stated before that he believes "in the tax based on the ability to pay: the income tax." Last month ITEP published its own report, agreeing with the governor's call for an income tax increase and recommending other reforms to help raise revenue and even out one of the most unfair tax systems in the nation.
Illinois lawmakers can continue this dance for only so much longer, since the budget currently in effect expires on June 30 and the state faces a deficit of $11.6 billion. Tax reform in Illinois is long overdue, but it remains to be seen whether or not lawmakers are serious about balancing the budget in time to avoid what one called an "apocalyptic series of funding cuts."
After years of relying on gimmicks and borrowing schemes to balance the state budget, Illinois elected officials are now signaling that they're prepared to think constructively and wisely about how to fill the state's $11.6 billion shortfall. Governor Pat Quinn, Cook County Assessor Jim Houlihan, and Senator James Meeks have each proposed tax reforms built around an increase in the state's personal income tax -- and have also proposed providing targeted income tax reductions for middle-income families.
Now ITEP has released its own tax reform proposal. In a new report, ITEP shows that an income tax rate increase, in combination with targeted tax credits, could raise $3.6 billion in new state revenues while actually cutting the overall taxes paid by the poorest sixty percent of Illinoisans.
There's good reason for this emphasis on income tax reform. The Illinois income tax is undeniably one of the lowest income taxes in the nation. Its 3 percent flat tax rate is the lowest top income tax rate in the U.S. And of the 41 states that levied broad-based income taxes in 2006 (the most current year for which data are available), only four states' income tax collections were lower, as a share of personal income, than Illinois.
For too long Illinois has chosen to balance its budget on the backs of low and middle income taxpayers. Progressive revenue-raising options (like those discussed in the ITEP report) that alter the income tax are key if Illinois lawmakers want to solve the state's budget crisis.
With the drama of newly impeached Governor Rod Blagojevich a distant memory, it's fine time that Illinois lawmakers got down to the people's business and worked to solve the state's startling $11.5 billion shortfall. According to the Chicago Tribune, if you converted the shortfall into $100 bills and stacked them it would make a tower 9 miles high and weigh 126 tons. The state of Illinois was surviving on borrowed money long before the current fiscal crisis rocked the Land of Lincoln. Part of the blame falls squarely on the shoulders of Governor Rod Blagojevich who infamously took a no new taxes pledge, saying, "We're not going to raise taxes on people." But then oddly, Governor Blagojevich turned around and proposed a gross receipts tax which would ultimately be paid by... people. When his proposal was defeated, he sat back and let the state go deeper and deeper into debt.
On Wednesday, Governor Pat Quinn worked to close the door on the Blagojevich era by proposing his own sweeping fix to the state's budget. Along with over $1 billion in cuts, he also proposes to increase the state's income tax rate from 3 to 4.5 percent and triple the personal exemption from $2,000 to $6,000. These are not easy times for governors of any state, but Governor Quinn's position is certainly unenviable considering the situation he is inheriting. The debate over how to solve Illinois' budget problems is far from over, but Governor Quinn's proposal is a welcome shift from the close-your-eyes-and-duck approach of his predecessor.
The New York Times reported earlier this week that the Empire State may use tax increases on the very wealthiest residents to help close a budget gap of roughly $15 billion. This is common sense, particularly since, as the Times notes, "Over the last 30 years, the trend has been to pare back income tax rates on the rich, federally and in the state. Since the mid-1970s, the state has cut its top tax rate from 15.375 percent to 6.85 percent." For more on New York's fiscal condition and ways to improve it, see this presentation by the Fiscal Policy Institute.
Progressive tax reform may also be on the horizon for Illinois. Much hope accompanies newly elected Illinois Senate President John Cullerton. Cullerton replaces retiring Senate President Emil Jones who often stood with Governor Rod Blagojevich against constructive tax changes to solve Illinois' budget woes. Senator Cullerton recently hinted that needed tax hikes may be in the state's future, alluding to the fact that all options to solve the state's infamous budget shortfall are on the table.
In a speech to the Senate Cullerton said, "In recent years, we have seen all the gimmicks and listened to all the quick-fix promises. But, we know they won't solve our problems. Instead we need a cooperative partnership -- and that requires sacrifice." Let's hope Cullerton can work to solve the state's budget with progressive solutions like increasing reliance on income taxes and lowering the state's dependence on property taxes instead of the litany of solutions floated in recent years (like increased borrowing and dependence on gambling) to solve the state's fiscal woes.
Rod Blagojevich, the Illinois governor who for years watched his states' finances spiral out of control because he refused to raise income or sales taxes, was arrested by FBI agents this week and is being charged with fraud and soliciting bribes.
Blagojevich opposed various measures that would have helped the state pay for public services, but he supported a regressive and complicated tax (a gross receipts tax) that would have effects similar to that of a sales tax.
Resignation, impeachment, conviction (maybe even two out of three) are all possible outcomes for the chief executive with the lexicon of a longshoreman.
Obviously, Illinois public policy is in enormous flux now, too. On one hand, Lt. Gov. Pat Quinn does not appear to be a big fan of sound tax policy. He championed a measure that would have allowed taxpayers to use the ballot to block local tax changes. (To assess the idea of deciding tax issues through direct democracy, one only needs to look at California's budget crisis.) On the other hand, legislative leaders like Speaker of the House Mike Madigan have left the door open to using the income tax to address the state's budget deficit.
To stay abreast of all the latest budget developments in Illinois, visit the Center for Tax and Budget Accountability's website.
As the vast majority of state governments stare down budget shortfalls, new ideas about how to responsibly and fairly fill those gaps should receive an enthusiastic welcome. A new report from Good Jobs First, entitled Skimming the Sales Tax, does exactly that by revealing that states are currently giving away over $1 billion through "vendor discounts" or "dealer collection allowances" that reduce sales taxes.
Vendor discounts allow retailers to legally keep a portion of the sales tax revenue they collect as compensation for the costs involved in collecting and remitting the tax. Twenty six states currently provide retailers with such compensation, amounting to a total of over $1 billion in annual revenue losses for those states.
The policy prescription in many states is fairly clear. While there may be room for debate over whether any compensation is warranted, what is not in question is that there should be a sensible limit on the maximum amount that any one business can receive via this practice. As author Philip Mattera points out, "the main expenses that retailers incur with regard to sales taxes, especially software programs to track them, are fixed costs that do not rise in tandem with growth in receipts."
Those states without such a limitation in many cases forfeit quite substantial amounts of revenue through vendor discounts. Illinois, for example, loses over $126 million annually due to the practice. Texas, Pennsylvania, and Colorado each lose in the neighborhood of $70 - $90 million per year. Thirteen of the twenty six states offering vendor discounts do not cap the amount any individual retailer can claim. In addition, five states that do impose limits on maximum compensation have set those limits at seemingly excessive levels, ranging from $10,000 to $240,000 per retailer.
For state-by-state details on existing vendor compensation practices, as well as other ways in which retailers are being subsidized through the sales tax, see the report here.
Chicago public school students boycotted classes this week. Illinois State Senator James Meeks organized a student boycott of public schools during the first week of classes to draw attention to the state's school funding crisis. The boycott began on Tuesday and was expected to go all week, but ended Wednesday when Sen. Meeks announced that Governor Blagojevich agreed to meet with him to discuss possible solutions. The Governor refused to meet with Senator Meeks if the boycott was in effect. Hundreds of students were said to have participated and organizers coordinated teach-ins for students in lobbies of area companies like Boeing and the Chicago Mercantile Exchange.
The state's current method of funding schools is based largely on property taxes and results in drastic and inequitable differences in per pupil spending across the state. This example cited by the Chicago Tribune shows the inherent inequity. New Trier Township spent nearly $17,000 per student in 2005-06 and Sunset Ridge spent about $16,000, while Chicago Public Schools spent an estimated $10,400 per student. For several years, Senator Meeks, Illinois Voices for Children, the Center on Tax and Budget Accountability, and ITEP have advocated reform of Illinois' tax structure in favor of less reliance on regressive property taxes and increased reliance on income taxes as a way to correct the flaws of the current school funding structure. Let's hope that this protest encourages the Governor to see beyond his "no new taxes" pledge and reform a terribly broken system.
Earlier this week, the Institute on Taxation and Economic Policy (ITEP) released a brief report using IRS data and revealing that the most unequal states in the country also happen to be states that lack the type of progressive tax provisions that could reduce this inequality and raise badly needed revenue. The most unequal states either don't have a personal income tax or have one in need of improvement. Consequently, these states are left with tax systems that, on the whole, are unsustainable, inadequate, and unfair over the long-run.
The IRS data show that, in 2006, ten states -- Wyoming, New York, Nevada, Connecticut, Florida, the District of Columbia, California, Massachusetts, Texas, and Illinois -- have greater concentrations of reported income among their very wealthiest residents than the country as a whole. Yet, the tax systems in these states generally ignore that very important reality. Of those ten states, four lack a broad-based personal income tax and three either impose a single, flat rate personal income tax or have a rate structure that all but functions in that manner. Three do use a graduated rate structure, but of these, two have cut income taxes for their most affluent residents substantially over the past two decades.
Given this mismatch, it should not be too surprising that over half of these states face severe or chronic budget shortfalls. After all, the lack of an income tax, the lack of a graduated rate structure, or moves to make the income tax less progressive all mean that a state's revenue system will not completely reflect the concentration of income among the very wealthy and therefore will not yield as much revenue.
Case in point: New York. As the Fiscal Policy Institute observes, over the last 30 years, the state has reduced its top income tax rate by more than 50 percent. Most recently, in 2005, it allowed to lapse a temporary top rate of 7 percent on taxpayers with incomes above $500,000 per year. Today, the state must confront a budget deficit of more than $6 billion for the coming year and more than $20 billion over the next three. New York residents seem to understand the disconnect between the enormous disparities of wealth in their state -- where the richest 1 percent of taxpayers account for 28.7 percent of reported income -- and the state's fiscal woes. A poll released this week shows that nearly 4 out of 5 people surveyed support increasing the state's income tax for millionaires. Hopefully, Governor David Paterson is listening. As it stands, he'd rather cap property taxes than ensure that millionaires pay taxes in accordance with their inordinate share of New York's economic resources.
In Illinois, Lt. Gov Pat Quinn and Cook County Commissioner Forrest Claypool are leading the charge to allow taxpayers to use the ballot to block local tax changes. Currently voters in the state don't have the power to decide tax questions through the ballot. But in response to the Cook County sales tax's recent increase to 10.25 percent, some now want the state assembly to give voters the power to stop tax increases by local governments.
To decide whether or not this is a good idea, one need only look around at the states that are already deciding tax issues via the ballot. One can look to Maine, where business interests are spending large amounts of money to convince voters to choose cheap beer over health care. Or look to Massachusetts, where some well-funded individuals have managed to secure a ballot question that would abolish the state's income tax, the source of 40 percent of the state's budget, without any provision to replace the money. Or look to the train wreck that started it all, California's Proposition 13, the infamous ballot referendum approved by the state's voters 30 years ago. One of the changes it made requires that the legislature approve any income tax increase by a two-thirds majority. Another provision limited property taxes to one percent of property's assessed value and limited increases in assessments to 2 percent each year. California's schools went from the best in the nation to among the worst as a result.
Why does direct democracy produce unfair tax policy? The answer is obvious. Every single state has people who are elected and paid to make policy decisions. It's their job. They are supposed to study up on issues, talk to the people who care about the issues, and make a an educated decision. Most of us don't have the time to put that kind of work into learning about public policy and formulating positions. That's why we pay our lawmakers to do it. If they do a good job we reelect them, if they do a terrible job we throw them out. Ballot referenda allow lawmakers to escape this responsibility by placing issues before the voters, who have not thought through certain intricate questions (like whether or not eliminating a state's income tax will make it impossible to pay for schools, health care and road repair).
As budget watchers have noted, the Illinois state government would probably not receive any awards for excellent fiscal policy these days. They will only make matters worse if they saddle the local governments with what is possibly the worst conceivable process for determining fiscal policy.
Ideas are being floated in Alabama and Illinois to address the regressive nature or their tax structures. Proponents of a revenue-neutral plan that has gained some attention in Alabama claim that it would cut taxes or keep them at their current level for 80% of taxpayers, while increasing taxes on only the wealthiest 20% of payers. Since the Alabama tax system is incredibly regressive, this would be a very welcome change.
Under the proposed plan, the income tax would be made more progressive by increasing personal exemptions and standard deductions, at a cost of about $250 million per year. Additionally, the regressivity of the Alabama sales tax would be reduced by exempting groceries. The grocery exemption would bring Alabama closer in line with the overwhelming majority of states, as Alabama is one of only two states that makes no effort to mitigate the regressive effects of the grocery tax. The $550 million price tag attached to these tax cuts would be paid for by eliminating Alabama's regressive tax deduction for federal income taxes paid. Only two other states allow for a full deduction of federal income taxes paid. Eliminating this deduction would increase taxes the most for those wealthiest Alabamians who have the highest federal income tax liabilities.
The reforms proposed in Illinois, and just recently approved by a Senate committee, would result in a net tax increase of about $3.8 billion to be used to fund education, early childhood programs, pensions, health care, and construction projects. Given that Illinois is projected to have budget deficits this year and for years to come, progressive tax increases seem like a very good idea. To ensure tax fairness, revenues would be raised by the most progressive tax available - the income tax. The personal income tax rate would increase from 3% to 5%, and the corporate income tax rate would rise from 4.8% to 8%. Offsetting much of this tax increase would be property tax cuts (a minimum of 20% of the school portion of property tax bills) and income tax credits for low-income families.
Unfortunately, the governors in each of these states are opposed to the plans (primarily to the tax increases for wealthier taxpayers). This means that if tax reform is to occur in 2008, it could be much less progressive than what has been proposed thus far. It's certainly refreshing, however, to see state lawmakers discussing these kinds of relatively major tax overhauls with fairness considerations obviously on the top of their agendas.
<p>Fortunately, both of these stimulus proposals are refundable, meaning that families receive the money regardless of how much, if any, state income tax they paid. This is an extremely important component of any fair credit or rebate since even though those in the greatest need often pay no income taxes because of their low incomes, they do pay huge portions of their incomes in regressive sales and property taxes.</p>
<p>One additional flaw with each plan is that low-income individuals without children will see no benefit. In terms of both stimulating the economy and assisting those in need, both of these plans could be improved by extending the rebates/credits in some form to individuals without children. This could be done very easily in Illinois by lowering the income eligibility criteria and using the resulting savings to assist low-income, childless individuals.</p>
In Kansas, several school districts are fighting to lure casinos into their boundaries. As the Kansas City Kansan notes, "Each of the five casino proposals on the table would bring different levels of funding to each of the local school districts." These local school districts are lobbying hard for casinos that would add to their their district's property tax base. Millions of dollars in new tax revenue -- as well as millions of dollars in social costs -- could result for the school district "lucky" enough to be the recipient of a new casino.
Meanwhile, Illinois lawmakers continue to grapple with funding education, construction, and Chicago area public transportation. Some are predicting a financial "doomsday" next year for the state if new revenues aren't created in a hurry. House Speaker Michael Madigan has come out in favor of a plan to increase state gambling to forestall the doomsday. His plan "would put a casino in Chicago, auction off two other licenses, expand existing riverboats and put thousands of slot machines and video poker at horse tracks." Illinois House members are expected back in Springfield on Monday to consider increased gambling.
Policymakers in both Kansas and Illinois have the opportunity to meet the needs of their residents through progressive and stable means, like income tax reforms. Unfortunately, gambling revenue is not stable over the long term and is certainly a regressive revenue source. Residents in both states lose when gambling proposals like these are on the table.
Faced with a looming budget hole, Illinois lawmakers shied away from addressing tax reform this year -- and elected officials in the state's biggest local government, Chicago's Cook County, now find themselves asking the hard questions state lawmakers avoided. A recent report from the Center on Tax and Budget Accountability shows that the county's current budget hole, estimated at $288 million, reflects a "structural deficit" -- that is, a recurring imbalance between the services a government provides and the revenues it uses to fund those services -- that will grow to over $800 million a year by 2012. The CTBA report explains that the county's heavy reliance on slow-growth property taxes and a narrow local sales tax base make the tax system incapable of keeping pace with the cost of funding important services. County lawmakers have proposed an increase in the county's already-high sales tax rate (without expanding the sales tax base to include currently-untaxed services), which would reduce the deficit but wouldn't directly address the sustainability concerns raised by the CTBA report.
Meanwhile, state and county lawmakers are engaged in a tug of war over whether to extend the county's soon-to-expire temporary caps on the growth of residential property taxes. The Chicago Tribune explains succinctly why such caps are bad policy.
After weeks of angst, political bickering, and general upheaval, Illinois Governor Rod Blagojevich recently signed a budget bill for Fiscal Year 2008. Controversy had not died by the time of the signing, and the Governor line-item vetoed nearly $500 million in so-called "pork" projects. But the Center on Tax and Budget Accountability examined the projects in question and found the state's budget was not really laden with pork. Its report concluded that "it does not appear necessary to change the state's name to 'Illinoink'."