Understanding Illinois’ Budget Deficit and Solutions

·         According to the Commission on Government Forecasting and Accountability (June 2011), besides federal sources of income, the state uses only eleven sources of revenue: personal income tax (but note that Illinois was tied for the fourth lowest individual tax rate on households in the top income bracket), corporate income tax (remember the recent extortionate tax breaks given to Illinois corporations?), corporate franchise tax and fees, public utility taxes, vehicle use tax, inheritance tax, insurance taxes and fees, cigarette taxes, liquor taxes, miscellaneous tax sources, and sales tax (though Illinois does not tax services like most other states for a significant source of revenue).

·         As stated by the Center on Budget and Policy Priorities (CBPP July 2009), “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… [States that do not tax services, such as Illinois], probably could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively… Five of the 45 states with sales taxes impose them on fewer than 20 services… Research finds that purchases of some services do not fall as precipitously as durable goods purchases do when the economy slows nor rise as rapidly when the economy is booming.”

·         Consider the fact that a broader-based taxation system would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (the Center for Tax and Budget Accountability).

·         The Chicago Metropolitan Agency for Planning (CMAP, July 2011) argues that the tax system in Illinois and most other states do not reflect today’s economic realities.  In the last several decades, the U.S. economy has slowly shifted from manufacturing industries to a “services and information-based economy... Since the early 1970s, spending on services has exceeded spending on goods…

·         “In 2010, consumers spent twice as much on services (66.9 percent of total personal consumption expenditures) as on goods (33.1 percent of total personal consumption expenditures).  This shift in the fundamentals of the economy has changed the relationship between consumption and tax revenue…  Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures” (CMAP).

·         The Chicago Metropolitan Agency for Planning also contends that the tax system in Illinois is inefficient.  “The tax system itself is influencing economic activity” by taxing goods that are consumed rather than the consumption of resources.   Furthermore, the tax system is also inequitable because “lower-income taxpayers typically spend a higher percentage of their income on tangible goods than higher-income people.”  

·         According to United for a Fair Economy, “at the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes.”

·         Likewise, the Institute on Taxation and Economic Policy (November 2009) claims that the State of Illinois does not tax equitably, and it is in the top ten of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners.   

·         The Institute on Taxation and Economic Policy (ITEP) further maintains that the top 5 percent of income earners in Illinois pay the least amount of sales, excise, property, and income taxes because of federal deduction offsets or substantial tax savings (regressive tax loopholes) from itemized deductions, such as capital gains tax breaks and deductions for federal income taxes paid that are coupled with a flat-rate structure.  “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor rarely save at all – the taxes are inherently regressive” (ITEP).

·         Illinois income tax uses a single rate structure that results in low-income wage earners paying more taxes than the wealthy.   As said by the Institute of Taxation and Economic Policy, Illinois is among ten states in the nation with the highest taxes paid by its poorest citizens at 13 percent. 

·         In 2007, the top one percent of wage earners in the U.S. (with an average income of just under $2 million a year) paid 6.4 percent in total taxes while the bottom 20 percent of wage earners (with an average income of just under $11 thousand a year) paid 10.9 percent in taxes (ITEP).   

·         The Center for Tax and Budget Accountability (CTBA February 2012) asserts that “given the current economic context, now is precisely the right time to increase tax revenue with a graduated income tax focused primarily on the top ten percent of income earners, as opposed to reducing the state’s budget deficit through significant service cuts [which include retirees’ healthcare and radical pension “reform”]…

·         “Given an appropriately designed graduated-rate structure, Illinois could cut the overall state income tax burden for 94 percent of all taxpayers—on average providing a tax cut to every taxpayer with less than $150,000 in base income annually, raise at least $2.4 billion more in revenue, and keep the effective individual income tax rate for millionaires well below five percent…  Illinois taxpayers with the bottom 94 percent of base income collectively would receive an annual tax cut of $1.06 billion… [T]he combined effect of this policy would be a stimulus to the economy from tax cuts and additional state spending (assuming that the additional revenue is used to fund current public services that would otherwise not be funded) that would create at least 36,000 private sector jobs in communities across Illinois…

·         “Most taxes imposed by state and local government, like sales, excise and property, are inherently regressive, that is, [they] take a greater share of the earnings from low-to-moderate income families than from affluent families.  Creating a graduated-rate structure for the Illinois income tax is one of the few strategies available to counteract the natural [regressive results] of most taxes. Illinois is denied this fundamental tax fairness tool by the state constitution [Article IX, Section 3(a)] that requires one flat income tax rate for all taxpayers…” (CTBA).

·         Indeed, solutions to the state’s budget deficit include increasing the state’s revenue sources by changing the current individual income tax to a progressive or graduated income tax; broadening the state’s tax base; taxing services; increasing taxation on “undesirable habits” like gambling, cigarettes and alcohol; implementing a more timely system of payments; eliminating unnecessary tax breaks and loopholes for corporations; increasing taxation on the wealthy to achieve fairness, and examining and improving the efficiency of the state’s government. 

·         Considering their spring legislative focus, it is apparent that many legislators are not contemplating today’s economic realities: Illinois’ economy has largely become a “services and information-based economy… [and that] changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures” (Chicago Metropolitan Agency for Planning, July 2011).

·         These same legislators, et al. also ignore the fact that Illinois “suffers from structural deficits or from failure of revenues to grow quickly as the cost of services…, [and that] structural deficits stem largely from out-of-date tax systems, coupled with costs that rise faster than the economy… Fixing these structural problems would help [Illinois] balance [its] operating budgets without resorting to [a reckless and radical “pension reform” instigated and propagandized by the Civic Committee of the Commercial Club of Chicago, the Civic Federation, Illinois Policy Institute, Chicago Tribune and their ilk]” (The Center on Budget and Policy Priorities, January 2011).