Tuesday, January 21, 2014

Senate Bill 1 Will Not Address Illinois’ Deficits, Indeed


“A study by the University of Illinois' Institute for Government and Public Affairs says the state's new pension plan, which should save it about $160 billion over 30 years, won't end up making a big difference in Illinois' deficits. The report was released Tuesday and argues that while the plan will get rid of the pension systems' unfunded liability over the next 25 years, Illinois' deficits will rise to $13 billion during that period of time. Researchers with the institute predicted a $14 billion deficit if pension reform was not implemented.”


Of course, breaking a constitutional contract with public employees will not address the state’s deficits; it will not address the unfunded liability either. (The following research is from an earlier post on April 16, 2012):

According to the Institute on Taxation and Economic Policy (ITEP) and the Center for Tax and Budget Accountability (CTBA), tax reform –where fairness, long-term revenue stability and a graduated tax rate – should be the State of Illinois’ priorities and solutions for the state’s budget problems, not so-called “pension reform” or breaking a constitutional contract with public employees.

The State of Illinois is one of a few states that do not tax equitably.  It is in the top 10 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 (ITEP).

The State of Illinois is one of seven states that use a flat-rate tax. In other words, the income of the wealthiest people is taxed at the same marginal rate as the poorest wage earners; thus, the highest taxes paid are by its poorest citizens at 13 percent (ITEP).

Furthermore, according to the Institute on Taxation and Economic Policy, the top five percent of income earners in Illinois pay the least amount of sales, excise, property and income taxes because of federal deduction offsets or substantial tax savings (regressive tax loopholes) from itemized deductions, such as capital gains tax breaks and deduction for federal income taxes paid that are coupled with a flat-rate tax structure. “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor rarely save at all – the taxes are inherently regressive” (ITEP).

“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).

The wealthiest people should pay tax rates commensurate with their incomes, but they do not in Illinois. Attempting to balance the state’s budget by scapegoating public employees and "impairing" their pension plans ignores the fact that Illinois has an inequitable tax structure. Close the corporate tax holes and direct that money to public school districts and their communities so our schools and our neighborhoods will not be deprived of the essential resources they need.

As stated by the National Council of State Legislatures, “A high-quality revenue system relies on a diverse and balanced range of sources.”  Furthermore, the Chicago Metropolitan Agency for Planning also asserts that the “Illinois tax system does not reflect today’s economic realities… Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures.”

As said by the Center on Budget and Policy Priorities (CBPP), “A majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… States that do not tax services [Illinois] probably could increase their sales tax revenue by more than one-third if they tax services purchased by households comprehensively.”  Increasing the individual’s state income tax was not the correct solution for increasing revenue in Illinois.

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” (CBPP).  According to the Center for Tax and Budget Accountability, policymakers need to “consider implementing a new revenue source targeted to repaying pension liabilities that is independent of base revenue streams from income, sales, and excise and utility taxes.” 

What also needs to be considered? “The State of Illinois does not raise enough General Funds revenue to fund critical public services. Its rate of growth is lower than what is needed to simply maintain existing levels of services after accounting for inflation and population growth” (CTBA). 

Because the State of Illinois cannot evade its unfunded debt, policymakers need to create a graduated tax rate that 43 other states in this country now utilize; they also need to design a broad-base tax base and a better timing of tax payments. The State of Illinois needs to increase taxation on the wealthy and put an end to their “corporate welfare,” in particular, their extortive tax breaks and loopholes. Moreover, the State of Illinois needs to recognize that “the pension ramp was designed in such a way that it’s unfeasible” (CTBA). 

Hence, there needs to be a required annual payment from the state to the pension systems; the debt needs to be amortized for a longer frame of time just like a home loan that is amortized (CTBA). According to the National Association of State Retirement Administrators, policymakers must also “keep in mind that state and local pensions accumulate and pay out assets over decades. They have an extended investment horizon.”  



The following analysis is from “Unrealistic Schedule for Repayment of Debt Owed to the Pension Systems Continues to Strain Fiscal Resources” by the Center for Tax and Budget Accountability. The data was posted on this blog on January 8, 2014:

In an analysis of FY2014 Illinois General Fund Budget, the Center for Tax and Budget Accountability states: “Being underfunded is nothing new for the state’s pension systems, not once in the last two decades have the systems collectively been funded at 80 percent... By far and away, the main reason the state’s contributions to its pension systems are increasing so much annually is the unrealistic, heavily back-loaded schedule the legislature set back in 1995 for repaying the debt the state owes to its pension systems…

“Of the $6.19 billion General Fund contribution to the five pension systems for FY2014, about $1.02 billion is attributable to the normal cost of the benefits being earned by current workers, while $5.17 billion constitutes debt repayment… Over four out of five taxpayer dollars paid as part of the state’s annual pension contribution go to paying down pension debt, not to funding benefits being earned by current workers… The greatest cause of the state’s unfunded liability has been borrowing against the pension systems… 

“Illinois lawmakers essentially borrowed against the pension systems for decades by underfunding what was owed, and instead diverted the revenue that should have gone towards pensions to fund the delivery of current services—like Healthcare, Education, and Public Safety… Even though PA 88-593 was ostensibly created to repay the debt owed to and resolve the underfunding of the pension systems, the legislation — by law — actually continued the practice of borrowing against contributions owed to the pension systems to subsidize the cost of delivering public services for 15 years after its passage...
 
To date, nearly all bills introduced to resolve this problem fail to accomplish that purpose for one simple reason: they focus on cutting benefits—which are not driving the annual cost increases—and avoid re-amortizing the debt, which is driving the increase in annual pension payments…”


For further reading, read John Dillon’s Structural Deficit: What It Means in Illinois.


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