Friday, April 29, 2016

“Adopt a progressive income tax structure in which the percentage you pay rises with your income” --Eric Zorn of the Chicago Tribune

From Eric Zorn, April 29, 2016:

“Allow me to begin today by responding to a version of the comment this column will inevitably provoke from scores of indignant readers: Raise taxes? So those idiots in Springfield will have even more of our money to spend? Never! Let them cut spending and reform state government instead!

“Yes, raise taxes.

“We have to. Illinois is falling further and further into debt every day — $200 million deeper in the hole every week, budget experts say — and even Failed Gov. Bruce Rauner has acknowledged that ‘new revenue’ has to be part of any comprehensive solution. We've lived beyond our means for too long…

“And since the sorts of regulatory and legal changes Rauner is advancing as part of his ‘turnaround agenda’ would take years to close that gap (if they would even close it at all), the question isn't whether the state should raise taxes, but which taxes it should raise.

“Some have proposed bringing Illinois in line with neighboring states by broadening sales taxes to include the sort of services that make up a larger and larger part of our economy. Others have suggested levying a tax on retirement income, as most states do, or imposing a 3 percent ‘millionaire's tax’ on income over that threshold. Many are saying we'll all have to suck it up and raise the flat rate on state income, which rolled back to 3.75 percent from 5 percent on Jan. 1, 2015.

“The best idea, however, is for Illinois to adopt a progressive income tax structure in which the percentage you pay rises with your income. The federal government does it that way, as do 34 states. Advocates call this a ‘fair tax’ because it shifts the burden of funding government toward those with a greater ability to pay without enduring hardship. And though fairness is certainly in the eye of the beholder, such a tax system does help compensate for the fact that low-wage earners tend to pay a greater percentage of their income in all taxes and fees combined than high-wage earners, and it encourages the sort of day-to-day consumer spending that boosts local economies…” (It's time for Illinois to graduate to a progressive income tax by Eric Zorn).

May 8, 2012:

A Pension Discussion with Eric Zorn, Pt. 2

To Glen:

The law protects all employees against the sort of discrimination you describe, but very few employees have what you describe as a “sensible expectation of continued employment,” much as they too would like to have it. Many reports – including one published in our pages last year – indicate that it’s so difficult, time consuming and expensive for administrators to fire tenured teachers for incompetence that they seldom attempt it.

But let’s not get sidetracked on these broader issues. I’m sure we agree, along with most of the public, that good teachers and other union employees should be protected from arbitrary and unfair treatment, and that bad teachers should be subject to the same consequences for incompetence as most workers everywhere.

I’m sure we also agree that a deal should be a deal, whether hindsight suggests it was a good deal or a bad deal. We can go round and round debating whether the teachers’ promised return on their retirement investment has been excessively generous – by which I mean greater than the return would have been if the money had been privately invested and guaranteed in a way that private investment is not -- but the fact is that this return was promised to teachers in binding contracts and that the state remains on the hook for that debt even though it failed to set aside money to pay it.

Where we may disagree is whether the state should continue, going forward, offering teachers and other public employees the same pension deals – the same level of return on investment. Particularly if doing so would require significant tax increases or program and service cuts.
I realize the state constitution may prevent even a prospective change in the pension deal, even as I’m sure you realize the state constitution prevents the implementation of a graduated income tax, which I’m inferring is what you’re alluding to when you mention our “inequitable revenue system.”

Is it really unfair – an unconscionable example of teacher bashing – to say “OK, we’ll make good on what we owe you as of today, but starting tomorrow (or as of the next contract) there’ll be a new understanding”? If so, do you have a better idea than just raising taxes to get us all out of this mess?

Eric Zorn

Dear Eric,

We both know how emotionally-charged words can incite: describing the pension promise of teachers as a “good or bad deal” or as “excessively generous” arouses negative feelings unnecessarily. The fact is these earned benefits are protected by a “legally binding contract,” as you say, and to “make good on what [the state] owes as of today” necessitates upholding Article XIII, Section 5 of the Illinois Constitution: 

“Membership in any pension or retirement system of the State… shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Teachers acquire a “vested” right when they enter the pension system. In other words, pension benefits commence at the time a teacher’s contributions begin. The General Assembly cannot modify benefits except through an agreed-upon and fair “modification through contract principles” (Eric Madiar, Is Welching on Public Pension Promises an Option for Illinois?). 

Furthermore, to respect contractual and constitutional promises as legitimate rights and moral concerns is at stake for EVERY citizen in Illinois. Why? Cheating ANY citizen’s guaranteed rights and benefits violates moral, ethical and legal principles implicit in the state and the U.S. Constitutions.

Illinois has a revenue problem and not a pension problem. Among the many proposals to “get us out of this mess”: eliminate the tax loophole for “Tax Increment Financing Districts”; eliminate “Edge Tax Credits” for large corporations; eliminate “Accelerated Depreciation” or “write offs” of all assets; eliminate “Single Sales Factor” that “allows large corporations to cut their taxes 80-90 percent, and  eliminate “Vendor Discounts” that allow companies “to keep an uncapped part of their state taxes as a ‘processing’ fee” (Illinois Tax Loopholes Cost Illinois Billions). There are many other suggestions, but these five recommendations would save approximately $2 billon, none of which raise taxes or require a constitutional amendment.

On the other hand, there is strong case to be made for a graduated income tax through a constitutional alternation. “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 create at least 36,000 private sector jobs in communities across Illinois… If Illinois were to adopt the same graduated income tax rate structure as Iowa, Illinois would raise $6.3 billion more in revenue than it does from its current five-percent flat rate, while over 54 percent… of all taxpayers would pay less in state income taxes” (The Case for a Graduated Income Tax in Illinois, The Center for Tax and Budget Accountability, February 2012).  

Though there was a pending bill (HJRCA0012, February 2011) to amend the state constitution to include a graduated income tax, the Illinois General Assembly chose to enact legislation giving tax cuts to profitable corporations instead.  Eric, what are your legal and ethical ideas for solving the state’s structural budget deficit? (A Pension Discussion with Eric Zorn, Pt. 2).


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