1. The state should adopt statutory language establishing for employees an unimpairable and enforceable contractual right to timely and sufficient employer pension contributions.
2. With that ironclad guarantee, employees could be asked to pay an additional contribution of 2% of their pensionable salary.
3. In order to sustain education, health care and other vital public services, all concerned parties should work together to close tax loopholes that benefit special interests and raise needed revenue, from among the $2 billion in revenue options outlined in this report.
The We Are One Illinois coalition remains open to other ideas and proposals that truly solve our pension funding issues and that are consistent with the principle of shared sacrifice…
1. Statutory Funding Guarantee
The State of Illinois must ensure that pension contributions from the employer are made on an actuarially sound basis. In this regard, we note that although the Illinois Constitution guarantees employee pension benefits, there is no guarantee that the employer will properly fund such benefits…
2. Employee Contributions
If sacrifice is truly shared and appropriate safeguards are established regarding employer contributions, employees eligible for Tier I benefits in the five affected systems – SERS, SURS, TRS, JRS, and GARS – could also be asked to contribute another 2% of pensionable pay over and above current contribution rates, phased in over two fiscal years. We estimate that such contribution increases will yield over $350 million annually by the end of the phase in. Public employees have said time and again that we are willing to do our part to aid in the stabilization of pension funding. We will do so if there is an ironclad guarantee that the state will fulfill its funding responsibilities. Moreover, we will join with all other concerned parties to ensure that sufficient revenues can be raised to fund all of the vital services that have in the past relied for their funding in part from pension borrowing.
3. Close Special Tax Breaks to Fund Vital Services
If Illinois is to stop relying on its pension systems as a credit card to pay for education, health care and other vital public services, all concerned parties must work together to close wasteful special tax breaks to raise needed revenue. The We Are One Illinois coalition strongly recommends that we look first at special tax breaks that benefit those who have gained the most from the Illinois economy and are in the best financial position to support public services. This section contains about $2 billion in revenue options. We also remain open to other ideas and proposals for revenue.
Illinois’ Revenue Challenges
Illinois is a low-tax state. Total state taxes amounted to just 5.5 percent of total in-state personal income in 2011, falling well behind the 6.2 percent fifty-state median and placing Illinois 37th in a ranking of state tax burden. This remains the case even after the income tax increase that took effect in 2011. (The most recent figures for combined state and local revenue date to 2010, before the January 2011 income tax increase. That data also shows a very low comparative tax burden, with Illinois ranking 42nd among the states in the share of personal income levied in all state and local revenues.)2
Such low taxes have proven inadequate to the state’s needs. Illinois has a longstanding history of structural budget deficits and underinvestment in core public services. Despite its higher-than average per-capita income, Illinois spends at below-average per-capita levels on education, human services, Medicaid, and public safety. The state also has carried out a deliberate, long-term policy of underfunding its public employee pensions. This has allowed the unfunded pension liability to grow despite the state’s low state employee headcount per capita (49th in the nation), low ranking among the states in education funding, and relatively modest pension benefits.3 The state’s neglect of its public commitments in all of these areas stems from an unwillingness to raise adequate revenues. Illinois has the potential to meet its revenue challenge by adopting reforms that will modernize the tax system, eliminate special tax breaks for corporations and the wealthy, and protect the state from the negative impacts of federal tax changes…
Reform Corporate Tax Expenditures
Illinois’ tax system is less productive than it could be given its statutory tax rates, because its “Swiss-cheese” structure allows numerous loopholes, credits, and exemptions. These tax expenditures constitute state spending just as much as budget appropriations, but they are carried out through the tax code. And, unlike budget appropriations, these tax breaks traditionally carry on from year to year with little evaluation as to their effectiveness – and without undergoing any competition for scarce resources that typifies the annual budgeting process. Tax expenditures get their funding first, before public safety, human services, education, or any other public priority. Although the General Assembly has begun to pay more attention to tax expenditures in recent sessions, it is unclear if this tradition will take hold absent a formal, systematic review process…
Traded-In Value Sales Tax Exemption
Illinois exempts the sales price of a vehicle, watercraft or other tangible property when the buyer trades in a used item of the same type in partial payment. This exemption cost the state $309 million in FY 2011, an astounding $200 million increase from 2010. It is debatable whether consumers receive any benefit from this exemption, which nevertheless serves to treat purchasers without trade-ins inequitably. California, the District of Columbia, Hawaii, Maryland and Michigan do not offer this exclusion. Illinois should eliminate the exclusion.
Illinois spent $234 million in tax subsidies on gasohol, biofuels, and ethanol tax preferences in FY 2011, an increase of $48 million from 2010. Taxpayer subsidies for these fuels, derived primarily from corn, soybeans and other agricultural products, are fiscally and environmentally wasteful, fail to promote sustainable energy production, and even drive up prices for food, and should be eliminated.
Economic Development Tax Incentives
The economic development tax incentives for businesses below cost $374 million in FY 2011, an increase of $18 million or 5 percent from FY 2010… A 2009 Illinois Department of Revenue review of the state’s business incentives concluded, “There is scant evidence that economic development programs and incentives have significant impact on economic growth.”5 This conclusion is echoed by the state legislature’s Commission on Government Forecasting and Accountability, which said a literature review found “state and local tax cuts and incentives are not effective for stimulating economic activity or creating jobs in a cost-efficient manner.” Business owners and site selection decision makers have consistently said factors other than state taxes or tax incentives, especially highway accessibility, labor costs, and the availability of skilled labor, play a larger role in investment and location decisions.6 This is consistent with the overwhelming body of research on business tax incentives, which shows that such incentives are ineffective at raising the level of a state’s economic development.7
Corporate tax subsidies also invite other problems, including inequities between industries and even between competitors within an industry, particularly favoring the largest, most profitable corporations. The Illinois Department of Revenue review found that the bulk of the subsidies benefited just a handful of companies.8…
Too often, states agree to weaken their revenue systems based on vague corporate claims of “job killing taxes” or a state’s lack of “business-friendliness” without any evidence of the actual tax burdens of companies. This overemphasis on lowering taxes ignores the relatively small role impact taxes have on states’ economic development climates and neglects the very important role those taxes play in funding the services and infrastructure that actually do attract investment and jobs. Once written into law, these tax breaks are rarely if ever reviewed to see if they fulfilled their intentions…
The economic development tax expenditures… will cost an estimated $374 million absent any other change in the claiming of credits or exemptions and before accounting for the impact of higher corporate income tax rates. It would be a reasonable goal to reduce economic development tax expenditures by half from that level, saving $187 million per year and offering the opportunity to reform the state’s economic development incentive efforts to focus on programs that best achieve the state’s highest priorities. In particular, since Illinois has multiple tax credit programs (such as the Enterprise Zone and High Impact Business programs) that are frequently bundled into a single incentive offer, it would be particularly beneficial for state policymakers to look comprehensively at these programs and redesign them to lower taxpayer costs while maximizing economic development benefits…
Sales Tax Vendor Discounts
Illinois rebates a portion of sales taxes that retail vendors collect, as compensation for the time and cost involved in collecting and remitting the tax. Illinois’ vendor discount program is the most generous in the nation, giving back 40 percent more than the next-largest state (Texas) as of 2008. Illinois’ program is generous to retailers for two reasons: first, the 1.75 percent discount rate is relatively high; second, and more importantly, the compensation is not capped. Sales tax vendor compensation is not universal among the states. For example, Iowa and Minnesota do not provide any vendor compensation for sales tax collection. Illinois is among just 26 states that provide it, and it is one of only 13 with no cap on the amount any individual store or chain can receive. This policy can be lucrative for large retailers. In 2008, a report by the taxpayer subsidy watchdog group Good Jobs First calculated that Wal-Mart alone received more than $8.3 million per year in vendor compensation.21 Illinois could generate $116 million in additional revenue by scrapping its sales tax vendor discounts. Alternatively, capping the discount to the first $1 million in sales would save approximately $100 million per year.22
Farm Chemical Exemption
The cost of this tax exemption was $241 million in FY 2011, an increase of 26 percent over the previous year. Rapidly growing tax breaks should be scrutinized to determine if they are being exploited to inappropriately lower tax liabilities and whether they continue to serve a worthwhile purpose cost effectively. Illinois should take steps to roll back the cost of this tax exemption at least to 2010 levels, which would save $50 million.
Non-Sales Tax Cost-of-Collection Compensation
In addition to the sales tax vendor discount (discussed above), Illinois also compensates the businesses that collect taxes other than the sales tax. In FY 2011, the state spent $47 million on cost-of-collection compensation and prompt payment discounts for motor fuel, telecommunications, cigarettes, hotel, liquor, underground storage tank, gas use and auto rental taxes.23
Newsprint and Ink Exemption
The state’s newspaper and magazine industry has enjoyed a special, industry-specific sales tax exemption on the newsprint (paper) and ink they purchase. This tax break cost Illinois $33 million in FY 2011.
Rolling Stock Exemption
The sales and vehicle use tax includes an exemption for business purchases of rolling stock (including motor vehicles, aircraft, watercraft or railroad vehicles) used in interstate commerce. The cost of this exemption grew by $25 million in FY 2011, a 77 percent increase from 2010. As with other rapidly-growing tax expenditures, this raises a question of whether tax provisions are being used to inappropriately lower tax liabilities and whether the exemption continues to serve a worthwhile purpose cost effectively.
Tax Foreign Dividends
Illinois exempts the dividend income of foreign affiliates from companies’ in-state income, even though such income is taxable at the federal level. Taxing foreign dividend income in Illinois would raise $386 million per year.
Repeal the Single Sales Factor
The Single Sales Factor determines a multistate corporation’s in-state income based only on instate sales rather than the traditional combination of sales, employees and property in the state. Since it was enacted in 1998, Single Sales Factor has benefited a handful of large multistate and multinational corporations, but has done nothing to benefit Illinois small businesses, and has failed spectacularly in boosting manufacturing employment as its promoters promised.24 The tax break was estimated to cost the state close to $100 million per year at the previous corporate income tax rate,25 equivalent to $146 million today.
Decouple from Federal Domestic Production Deduction
Section 199 of the federal Internal Revenue Code allows companies to claim a tax deduction based on profits from “qualified production activities,” a sweeping category that goes well beyond manufacturing to include such diverse activities as food production, mining, filmmaking, and utilities. The deduction is unlikely to protect or create jobs within the state, because multistate corporations can claim the deduction for out-of-state “production activity” just as they can for in-state activity. Twenty-two states, including Indiana, Wisconsin and Minnesota, have decoupled from this federal deduction in order to preserve state revenue. Illinois could recoup more than $146 million (based on the new corporate tax rate) by decoupling from this provision.26
Repeal the CME-CBOE Special Tax Break
After threatening to leave the state, the Chicago Mercantile Exchange and the Chicago Board Options Exchange won an expensive new tax break last year that lowers the share of electronic trading income apportioned to the state from 100 percent in 2011 to 27.54 percent by 2013. This tax giveaway for just two financial institutions will cost the state $85 million per year by FY 2014.27
Special tax breaks for well-connected corporations are not a solid foundation for economic equity and prosperity and should be repealed.
Tax Offshore Oil Drilling
A loophole in Illinois’ tax code allows profits from oil production activities in the outer continental shelf to go untaxed. Other states, including Iowa, do consider profits from such activities in their calculations of tax liabilities for in-state companies. The state Senate in May passed a measure (House Bill 5342) to close this loophole, which would prevent the loss of $75 million per year.28
Equalize Satellite and Cable TV Taxes
Satellite TV companies currently are exempt from the 5 percent franchise tax that cable TV companies pay to municipalities. The state Senate in May passed a bill (House Bill 5440) to levy a 5 percent tax on satellite companies, raising $75 million per year.29
Repeal the Estate Tax Exemption Increase
Illinois increased its estate tax exemption from $2 million in 2011 to $3.5 million in 2012 and $4 million thereafter. Expanding a tax benefit to such a small portion of the very wealthiest residents will cost $41 million in FY 2013 and $64 million in FY 201430 – lost revenue that cannot be justified on economic development or equity grounds. The state should repeal this expanded exemption and restore the $2 million exemption.
End the For-Profit Hospital Tax Break
Illinois for-profit hospitals won a big tax break in a little-noticed provision of the Medicaid bill last spring. This law gives for-profit hospitals a tax credit for the lesser of their charity care, or their property tax bill. So it does nothing to incentivize charity care spending beyond the cost of their property taxes. Worse, unlike residential property tax credits, the hospitals can sell their unused credits or carry them forward for up to five years.31 The savings would be $10 million to $15 million per year, with $5.5 million of that going to one company, Vanguard Health Systems of Nashville, Tennessee.
Tax Digital Goods
Illinois could gain an estimated $10 million per year by extending the sales tax to digital goods like books, magazines, music, movies and games that are delivered electronically to consumers. The state already taxes such purchases when they are delivered in tangible form. At least 23 states already tax such goods delivered electronically, including nearby states Indiana, Kentucky and Wisconsin, as well as many states with “low-tax” reputations including Alabama, Arizona, Idaho, Mississippi, Nebraska, South Dakota, Tennessee, and Utah.32
Payments to the pension funds are not only a constitutional necessity but the fulfillment of the state’s ethical obligation to the people who teach our children, keep our communities safe, and provide assistance to those in need. The public workers Illinoisans rely on – teachers, caregivers, firefighters, nurses, police officers, and corrections officers, to name a few – have been promised that they will have a secure retirement in return for their service. The state must stop using its pension funds as a credit card to pay for education, public safety, health care, and other core services, and it must repay the money it has borrowed from those funds. At the same time, it is critical that Illinois has replacement revenue to fund the vitally important public services that have historically been sustained by pension borrowing. The We Are One Illinois coalition has put forward a proposal that achieves that goal, and that recognizes that benefit cuts are neither legally permissible, equitable, nor economically sound. Instead, we present a plan based on the principle of shared sacrifice that requires the state to fund its retirement systems, asks more from employees, and protects funding for vital public services by raising needed revenue.
for the 30-page document: Analysis of Worker and Retiree Pension Benefit Cuts under the Quinn Plan and HB 6258
A brief response:
An “Ironclad guarantee that the state will fulfill its funding responsibilities": since Illinois Democrats want to shift the state’s payment for the pension systems to school districts and universities, besides reforming the "pension ramp," I believe that a graduated income tax is the most important proposal to consider for raising revenue in Illinois.
"A Well-Designed Graduated Income Tax Rate Structure Could Reduce Taxes for 94 Percent of Illinois Taxpayers and Raise at Least $2.4 Billion more in Revenue than the Current Five Percent Flat Tax.
"If Illinois passed a constitutional amendment permitting the creation of a graduated income tax rate it could structure those rates in a number of different ways. For instance, if Illinois were to adopt the same graduated income tax rate structure as Iowa, Illinois would raise $6.3 billion more in revenue than it does from its current five percent flat rate, while 54 percent—over half—of all taxpayers would pay less in state income taxes."41
Two questions public employees need to ask:
1) Even if legislators invited union leaders to the table, why bargain away any of the public employees’ “constitutionally-guaranteed” rights and earned benefits? “A public employee obtains ‘vested rights’ in the Pension Code provisions relevant to pension benefits when the employee becomes a member of a pension system by making his or her initial employee contribution to the system. In addition, the Pension Clause protects pension benefit rights as an enforceable contractual relationship” (Eric M. Madiar, “Is Welching on Public Pension Promises an Option for Illinois” p. 36).
2) Why modify the “constitutionally-guaranteed” Pension Clause “through contract principles” when Speaker of the House Madigan has made this quite clear: “Let the courts decide”?