"Public pensions are under assault throughout the United States. Led to believe that retirement costs for government workers are out of control, governors and legislators in numerous states have been moving to cut benefits and tighten eligibility requirements.
"While it is true that numerous public pension systems are underfunded because of past decisions by policymakers and because the financial crisis harmed the value of pension-plan investments, that does not necessarily mean that the costs of benefits are excessive...
"While many numbers are bandied about, the central issue is how much of an obligation is being taken on each year to provide benefits for current government employees such as teachers and first responders. The best way to measure this is to use an amount known as employer normal cost. Such costs can be found in the annual financial reports that each public pension plan has to produce. In the case of Illinois there are three main plans administered by the state: the State Employees’ Retirement System of Illinois (SERS), the Teachers’ Retirement System of the State of Illinois (TRS), and the State Universities Retirement System of Illinois (SURS). The most recent financial reports indicate annual employer normal costs of $569.8 million for SERS2; $842.5 million for TRS3; and $442.8 million for SURS.4 The total is about $1.85 billion.
"How should this amount be viewed? One approach is to compare it to the financial costs incurred by the state in supporting business through economic development subsidies and other special tax provisions. While not providing an assessment of the effectiveness of any particular subsidy or provision at achieving targeted policy objectives, such as creating family-wage jobs, this approach does provide an important perspective on public sector pensions.
"Subsidies have been another controversial issue in the state. Some of the biggest giveaways came in 2011, when Sears got a $275 million state-local package and Motorola Mobility (now owned by Google) got $117 million.5 House Speaker Michael Madigan recently called on the legislature to 'resist the temptation to cave in to corporate officials’ demands every time they impose a deadline for payment in exchange for remaining in Illinois.'6
"Illinois provides other lucrative tax breaks for business. The most expensive is the exemption for Manufacturing and Assembling Machinery and Equipment, which costs $183 million a year. An electricity excise tax for enterprise zones costs $39 million, and the Manufacturers’ Purchase Credit against the sale tax costs $37 million. The Two Million Dollar Cap on the Franchise Tax for Corporations results in a revenue loss of $18 million, while the research & development tax credit costs $10 million. An archaic tax rule that allows retailers to keep a portion of the sales tax revenues they collect from customers costs Illinois about $121 million a year, more than in any other state.
"Illinois is one of the states that allow corporations to apportion their taxable income by methods other than the traditional three-factor (payroll, property and sales) weighting. About a decade ago, the cost of the single sales factor policy to the state was estimated at $63 million a year.8 The state’s tax expenditure report does not include updated estimates.
"Another major form of corporate tax avoidance that eats into state revenues is the use of offshore tax havens. In January 2013 the u.s. PIRG Education Fund published a report in which it calculated the impact of this practice on each state. For Illinois, the estimated annual cost is $1.9 billion.9
"The total of these corporate subsidies, official tax breaks and unofficial tax dodging amounts to more than $2.4 billion per year, as summarized in the table below.
"In other words, the annual taxpayer cost of
funding the retirement benefits of current Illinois public employees belonging
to the main state administered public pension systems is only 77 percent of the
cost to the state of economic development subsidies and corporate tax breaks
and loopholes."
EDGE Tax Credit
|
$31,259,000
|
Film Production Services
Tax Credit
|
$11,826,000
|
Enterprise Zone and River
Edge Redevelopment Zone Investment Credit
|
$7,602,000
|
Manufacturing and
Assembling Machinery and Equipment Exemption
|
$183,000,000
|
Enterprise & Foreign
Trade Zone High Economic Impact Business Electricity Excise Tax Exemption
|
$39,759,000
|
Manufacturers’ Purchase
Credit
|
$37,500,000
|
Two Million Dollar Cap on
Franchise Tax for Corporations
|
$18,374,000
|
R & D Tax Credit
|
$11,476,000
|
retailer’s discount
(vendor discount)
|
$121,000,000
|
Single sales factor
|
unknown
|
Revenue loss from
corporate use of offshore tax havens
|
$1,939,000,000
|
TOTAL
|
$2,400,796,000
|
from Richard Palzer:
ReplyDeleteInsufficiently, but corporate subsidies have been an issue--recall the blackmail of industries threatening, with some following through, to move to other states unless they received the tax breaks they demanded. Even Madigan complained of how much tax revenue IL was losing because of such deals. Taxpayers will point out that businesses create and keep jobs, so are more willing to ignore or tolerate subsidies. Pension benefits are another story--as much as they should, taxpayers don't appreciate the value--and so have become the prime target. More understandable to the public, from my perspective, is the fact that the cost of benefits doesn't drive the financial crisis, so I'm more inclined to emphasize the fiscal irresponsibility of past legislatures as the culprits. The unanimous Supreme Court decision--including the explanation, which essentially endorsed what we've been arguing from the start--should be clear and definite enough to make the case that we're not the bad guys. I'm still not convinced that the public really gets the point, though--that's why I think emphasis should be on how much benefit costs pale in comparison to the borrowing costs. The Court gave them the real target--taking the onus off benefits can only be a plus.
--Richard