Thursday, February 14, 2013

What about addressing the real causes of Illinois’ fiscal problems: Tax Policy, Revenue and Pension Debt?

“The [Illinois] public sector has… continued to be a drag on the state’s labor market, with government employment in the state down twice as much as nationally on a year ago basis. A greater reliance on unpredictable federal funding is one of several pressing fiscal issues facing the state, which has such severe budget troubles of its own that it cannot continue current services, provide promised benefits, and invest in education and infrastructure while keeping tax rates unchanged. The state’s severely unfunded pension system is the biggest impediment to a sustainable budget. While many states have unfunded pensions, Illinois’ situation is especially bleak. The shortfall of its five retirement systems is estimated to be $97 billion. Collectively, they have a funding ratio of 39%, the lowest in the nation and about half of what is considered healthy…” (from a report prepared by Moody’s Analytics/ Economic & Consumer Credit Analytics for the Commission on Government Forecasting and Accountability).

The state’s “severely unfunded pension system” is one of the effects of past legislators’ malfeasance.

Shouldn’t current Illinois legislators consider:

·         The current “Pension Ramp” does not work for the five public pension systems. The “Ramp” entails larger payments today as a result of the 1995 funding law – Public Act 88-0593 – to pay the pensions systems what the state owes. The pension debt needs to be amortized for a longer frame of time “just like a home loan that is amortized.” Though the initial payment will be greater in the beginning, over the long term it will become a reduced cost and a smaller percentage of the overall Illinois budget as it is paid off throughout the years (Executive Director Ralph Martire, Center for Tax and Budget Accountability).

·         “For over 40 years Illinois borrowed against what it owes the pension systems to pay for public services – like education… The reason Illinois borrowed from the pensions was to paper over the consequences of its poor tax policy, which is so flawed that after adjusting solely for inflation and population growth, the cost of maintaining services from one year to the next grows at a rate greater than state revenue. Rather than fix things by engaging the politically-difficult task of reforming tax policy, elected officials have consistently chosen the politically-expedient path of borrowing from pensions to pay for schools and, well, everything else” (Ralph Martire, Bad tax policy equals poor education funding).

·         “The State shall provide for an efficient system of high quality public educational institutions and services… The State has the primary responsibility for financing the system of public education” (Article X, Section 1 Constitution of the State of Illinois).

·         “Decades of mismanagement and failure to match contributions are the predominant reasons that the state’s pension systems are suffering to the degree that they are today. Years of pension holidays, continually borrowing against the systems without a plan for repayment and a severe economic recession, which caused investments to plummet, further exacerbated the problem” (Senate President John Cullerton, Pension Promise Paradigms).  Thus, there needs to be a required “actuarially-sound” annual payment from the state to the pension systems and not a constitutional challenge that breaks a contract with public employees, via so-called “pension reform.”

·         Raising appropriate revenue will pay the state’s debts, especially the unfunded liabilities that past General Assemblies had created. 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…” (Executive Director Ralph Martire, Center for Tax and Budget Accountability).

·         Taxing services; broadening the sales tax base to include selected consumer services will increase the state’s revenue. Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities).

·         Eliminating the tax loophole for “Tax Increment Financing Districts” will provide additional revenue.

·         Eliminating “Edge Tax Credits” and other tax loopholes for large corporations in Illinois will free up further revenue.

·         Increasing taxation on the wealthy will produce surplus revenue. 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).

·         A Speculation Sales Tax for Illinois (Bill Barclay, Chicago Political Economy Group): $1 on contracts traded on Chicago derivative exchanges (Chicago Mercantile Exchange and Chicago Board Options Exchange) will supply even more revenue.

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