Monday, April 16, 2012

A View of the Illinois Public Pension Dilemma, Pt. III

According to the Institute on Taxation and Economic Policy (ITEP) and the Center for Tax and Budget Accountability (CTBA), pension reform should not be the focus or the conversation. The dialogue should be about tax reform, where fairness, long-term revenue stability and a graduated tax rate become the State of Illinois’ priorities and solutions for its budget problems.

The State of Illinois is one of a few states that do not tax equitably.  It is in the top 10 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 (ITEP). 

The State of Illinois is one of seven states that use a flat-rate tax. In other words, the income of the wealthiest people is taxed at the same marginal rate as the poorest wage earners; thus, the highest taxes paid are by its poorest citizens at 13 percent (ITEP). 

Furthermore, according to the Institute on Taxation and Economic Policy, the top five 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 deduction for federal income taxes paid that are coupled with a flat-rate tax 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).  

“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” (United for a Fair Economy).  

The wealthiest people should pay tax rates commensurate with their incomes, but they do not in Illinois. Attempting to balance the state’s budget by scapegoating public employees and "impairing" their pension plans ignores the fact that Illinois has an inequitable tax structure. Close the corporate tax holes and direct that money to public school districts and their communities so our schools and our neighborhoods will not be deprived of the essential resources they need. 

As stated by the National Council of State Legislatures, “a high-quality revenue system relies on a diverse and balanced range of sources.”  Furthermore, the Chicago Metropolitan Agency for Planning also asserts that the “Illinois tax system does not reflect today’s economic realities… Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures.” 

As said by the Center on Budget and Policy Priorities (CBPP), “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… States that do not tax services [Illinois] probably could increase their sales tax revenue by more than one-third if they tax services purchased by households comprehensively.”  Increasing the individual’s state income tax was not the correct solution for increasing revenue in Illinois.  

There needs to be a modernization of state and local budgets and their revenue systems. “The structural problems that have built up over time in these systems need to be addressed” (CBPP).  According to the Center for Tax and Budget Accountability, policymakers need to “consider implementing a new revenue source targeted to repaying pension liabilities that is independent of base revenue streams from income, sales, and excise and utility taxes.”  

What also needs to be considered? “The State of Illinois does not raise enough General Funds revenue to fund critical public services. Its rate of growth is lower than what is needed to simply maintain existing levels of services after accounting for inflation and population growth” (CTBA).   

Because the State of Illinois cannot evade its unfunded debt, policymakers need to create a graduated tax rate that 43 other states in this country now utilize; they also need to design a broad-base tax base and a better timing of tax payments. The State of Illinois needs to increase taxation on the wealthy and put an end to their “corporate welfare,” in particular, their extortive tax breaks and loopholes. Moreover, the State of Illinois needs to recognize that “the pension ramp was designed in such a way that it’s unfeasible” (CTBA).   

Hence, there needs to be a required annual payment from the state to the pension systems; the debt needs to be amortized for a longer frame of time just like a home loan that is amortized (CTBA). According to the National Association of State Retirement Administrators, policymakers must also “keep in mind that state and local pensions accumulate and pay out assets over decades. They have an extended investment horizon.”  Therefore, the focus should be on revenue and not pension reform!  

It is absurd and deleterious to eliminate a teacher's compounded Cost-of-Living Adjustment (COLA) “meant to reduce inflationary erosion of the purchasing power of retirement benefits” (National Council of State Legislatures),  or to extend a teacher’s years of employment, or to cap salary on the amount of money earned for a teacher’s retirement, or to shift the state’s normal costs to school districts as an exchange for a “contractually-binding funding schedule.”  It is preposterous and irresponsible that Illinois policymakers have not fully funded the pension systems for decades, and that they have continuously attempted to violate the constitutional guarantee of public employees and retirees as well.

Maybe we should call our mortgage loan officers and ask them to help us pay down our mortgage “going forward” as a “shared sacrifice!”  Maybe we should ask them to cap their salaries too, work longer hours and more years before they retire, and reduce their own cost-of-living adjustments! While we're at it, let's ask the General Assembly and members of the Civic Committee of the Commercial Club of Chicago and Civic Federation to eliminate their Social Security COLAs, extend their retirement ages, cap their exorbitant pensionable salaries, and pay the unfunded liability instead.  

-Glen Brown

References used for this post and for more information, please read:

“Plain and Simple” (February 15, 2012) 

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