Monday, June 4, 2012

“Duress” and a Reminder about the Most Important Issue

Perhaps one of the most significant statements made in Springfield last week was by John Stevens, Legal Consultant for the “We Are One” Labor Coalition: “To take away the Cost-of-Living Adjustment [COLA] for [current and future] retirees is not a free and fair choice. It is a coercive choice under duress.”  

I wrote recently about the concept of duress (or coercion) as a vitiating (legally defective) factor. Legislators of the State of Illinois are breaching a contract by forcing public employees to make a choice to diminish their originally-vested and paid-for guarantee. Legislators are breaking an enforceable promise, one that is bilateral and emphasizes an agreement between the State of Illinois and its public employees as to their future rights and benefits. 

Regarding the diminishment of the COLA, SB 1673 offers public employees no ethical and lawful alternatives except to consent to the General Assembly’s demands by choosing between two illicit choices; second, this is unlawful because of the illegitimacy of the General Assembly’s advantageous attempt to renegotiate a constitutionally-guaranteed contract; third, it is unlawful to induce undue pressure upon public employees to make an unfair choice; fourth, this is an unjust financial enhancement for the General Assembly because it is a breach of contract for public employees to receive less than what the original vested right and benefit  guaranteed, and it is also a blatant exploitation of influence to obtain an unwarranted advantage. 

“The notion that, whenever a privilege or benefit might be withheld altogether, it may be withheld on whatever conditions government chooses to impose, has been repeatedly repudiated since the mid-20th century… Unconstitutional conditions – those that make enjoyment of a benefit contingent on sacrifice of an independent constitutional right – are invalid…” (Lawrence H. Tribe, American Constitutional Law).  

There are practical alternatives that will enable the state to uphold its contract with public employees, and they are also constitutional. Have we already forgotten what these practical alternatives are and what the General Assembly can do instead of misappropriation? Here is a recap:

·         According to the National Association of State Retirement Administrators, policymakers must “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 structural tax reform and not pension reform; 

·         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” (The Center on Budget and Policy Priorities);  

·         “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);

·         “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor [can] rarely save at all – the taxes are inherently regressive” (The Institute on Taxation and Economic Policy, ITEP). Illinois income tax uses a single-rate structure that results in low-income wage earners paying more taxes than the wealthy. Note Illinois is among 10 states in the nation with the highest taxes paid by its poorest citizens at 13 percent (ITEP);

What Should Be Done Instead of Pension Reform?

·         Tax services. Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities);

·         Establish a financial transaction tax or “Robin Hood Tax”: a .50 cent tax on every $100 of transacting. “We used to have a financial transaction tax in this country from 1914 to 1966” (Bill Moyers); 

·         “Broaden the sales tax base to include selected consumer services for an estimated new revenue of $550 million a year” (Illinois Education Association, IEA); 

·         Increase taxation on the wealthy: Illinois is in the top 10 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);

·         Close tax loopholes for corporations, especially oil companies and their offshore drilling “for an estimated new revenue of $75 million a year” (IEA); 

·         Eliminate the tax loophole for “Tax Increment Financing Districts” and save “$1.2 billion a year” (Greg Leroy from a national policy resource center for corporate and government accountability in Washington, DC,;

·         Eliminate “Edge Tax Credits” for large corporations and save “$347 million a year”; eliminate “Accelerated Depreciation” or “write offs” of all assets and save “$333 million a year” (Leroy);

·         Eliminate “Single Sales Factor” that “allows large corporations to cut their taxes 80-90% and save “$96-217 million a year”; eliminate “Vendor Discounts” that allow companies “to keep an uncapped part of their state taxes as a ‘processing’ fee” and save “$126 million a year” (Leroy);

·         Reinstitute “fund sweeps”: surplus revenue should be added to the General Revenue Fund “for an estimated new revenue of $300 million a year” (IEA); 

·         Add “exceeded revenue” from the Road Fund (motor vehicle and driver’s license fees) to the General Revenue Fund “for an estimated new revenue of $250 million a year”; reduce aggregate transfers/eliminate “some statutory transfers” from the General Revenue Fund “for an estimated new revenue of $200 million a year” (IEA);

·         Eliminate or cap the “retailers’ discount” that businesses keep: 1.75% of sales taxes paid for by the rest of us “for an estimated new revenue of $100 million a year” (IEA); 

·         Implement a more timely system of payments (cash management practices are greatly affected by budgetary practices in relation to deferred liabilities which place additional pressures particularly in the first and second quarters of the year to pay those expenses; timing of tax payments also affects the state's cash flow and should be adjusted accordingly); 

·         Examine and improve the efficiency of the state’s government; 

·         Finally, with a constitutional amendment, “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…” (The Center for Tax and Budget Accountability).

We cannot forget that Illinois legislators have diverted nearly $15 billion from the Teachers' Retirement System over the past decades. General Assemblies have created the pension systems’ unfunded liabilities and, as a result, the State of Illinois has a serious REVENUE PROBLEM at present that must be resolved.

For further reading: “Understanding Illinois’ Budget Deficit and Solutions” (March 2)

“Illinois Pension Reform, Senate Bill 1673, Is Without Legal and Moral Justification” (May 29)

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