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Thursday, June 6, 2013
What is more important than the hoopla over Illinois’ recent downgrade (Part 3)? How about legal and moral solutions?
Breaking a constitutional contract with public employees will not solve the revenue and pension debt problems in Illinois.
· 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 (a flat payment) “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;
· Make the 2011 income tax hike permanent. Designate the additional 2% in income taxes (approx. $7 billion per year) solely for paying down the unfunded liability… Secure enough funding through sale of pension bonds to erase the entire unfunded liability at a suitable rate ($100 billion at 6.5%). This will turn “soft” debt into hard debt and a guaranteed payment for (let’s say) 25 years in an amortized and consistent method to pay back bondholders… Bond companies will now have a commitment to timetables and repayments they do not have currently from Illinois. They may also be willing to assist in this re-amortization of expenses. The annual payment will be known and unchanging as the state moves forward. The economy in Illinois (5th highest GDP in all 50 states) will gear up, and there will be a lessening of expense and a growth in revenue. There will be no constitutional fight, and public sector employees’ contributions and good works would be honored…;
· Raise revenue through a graduated-rate structure to pay the state’s debts. 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, CTBA);
· Tax services. Broaden the sales tax base to include selected consumer services. Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities);
· Eliminate “Edge Tax Credits” (The Illinois EDGE program is administered by the Illinois Department of Commerce and Economic Opportunity (DCEO). A Business Investment Committee of the Illinois Economic Development Board (IEDB) makes recommendations regarding the types of projects that may seek this tax credit);
· 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);
· 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);
· Create a Speculation Sales Tax: a $1 per transaction on contracts traded on Chicago derivative exchanges (Dr. William Barclay);
· Establish term limits for Illinois legislators.
Read the two previous posts for more solutions.