Friday, June 14, 2013

Phasing out state's income tax hike would be a disaster by Ralph Martire

Nobody likes taxes. But everybody should be thankful Illinois increased its income taxes in 2011.

Here's why. Illinois lawmakers just enacted a General Fund budget for fiscal 2014 that starts July 1. Even a cursory review of that budget makes three things abundantly clear. First, a structural imbalance between revenue growth on one hand and service-cost growth on the other continue to plague state government.

Overall, the fiscal 2014 budget calls for $9 out of $10 dedicated to education, health care, social services and public safety — a total of $24.5 billion in spending on services. Of that amount, however, anywhere from $8.35 billion to $8.9 billion, or 34 to 36 percent, will be deficit spending. Which is nothing new. According to the state comptroller's office, this will be the 22nd consecutive year in which Illinois has run a General Fund deficit.

Second, spending on services doesn't drive these ongoing fiscal problems, but flawed tax policy does. Indeed, overall service spending is scheduled to be $214 million less in fiscal 2014 than the previous year, the fourth consecutive year spending on services will be reduced in nominal dollars. In fact, after adjusting for inflation, service spending will be 28 percent less in real terms in fiscal 2014 than in fiscal 2000. Again, this is nothing new.

Illinois historically has been a low-spending state, ranking 32nd in General Fund spending as a percentage of GDP, despite having the fifth-largest population and economy of any state and the 17th-greatest GDP per capita. Yet state tax policy is so flawed that even when spending is flat or reduced in real terms over time, deficits nonetheless materialize because of insufficient revenue growth.


Third, the 2011 temporary tax increases are all that stand between Illinois and insolvency. As things are, the accumulated deficit for fiscal 2014 will range from $8.35 billion to $8.9 billion out of a total service budget of $24.5 billion, which is pretty bad. But consider this: Assuming spending on services remains as scheduled for fiscal 2014 and all the spending cuts from the prior four years are left intact, the state's accumulated deficit would be a whopping $34 billion in fiscal 2014. That's almost $10 billion more than the entire budget for services.

Despite all the charged rhetoric to the contrary from anti-tax scolds, the revenue from the temporary tax increases has almost stabilized the state's fiscal condition, albeit with an accumulated deficit ranging from $8.3 billion to $9.1 billion annually. But that's a far cry better than the $11.5 billion to $34 billion deficit Illinois would've had over the same sequence without the tax increases.

Of course, being temporary, the 2011 tax increase will begin phasing out over the next two years, causing $5 billion in lost revenue annually. If this happens, Illinois will have to impose crippling cuts to education, health care, human services and public safety. Which, given Illinois' status as a low-spending state, is hard to justify. The facts are clear — ignoring its flawed tax policy is more ignorance than Illinois can afford.

from Phasing out state's income tax hike would be a disaster by Ralph Martire

Also review Understanding Illinois' Budget Deficit and Solutions

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