|
 Illinois voters soundly rejected income tax hikes as a strategy
to fix the state’s financial problems on Election Day, with nearly 55% saying
“no” to the so-called “fair tax” amendment.
Lawmakers should now turn their attention to reforming the state’s
worst-in-the-nation pension crisis. The only realistic path to balancing
Illinois’ budget while protecting programs for the state’s most vulnerable
residents starts with a constitutional amendment to allow pension reform.
Instead, Gov. J.B. Pritzker now warns he will look to some combination of
“painful” cuts and tax hikes on everyone. All program spending, including core
government services, could face up to 15% across-the-board cuts. He’s also
considering supporting a hike in the flat tax by up to 20%.
Pritzker should abandon both of these crude deficit-closing strategies and
pursue better available alternatives.
‘Fair tax’ fallout
The progressive tax amendment, Pritzker’s signature policy proposal, would have
scrapped the flat tax protection from the state constitution in favor of new
taxing powers that allow lawmakers to divide the population into segments and
charge varying rates based on income. Pritzker has touted income tax increases
as a strategy for closing Illinois’ long-running budget deficit since his
campaign for governor in 2018.
However, the $3 billion haul expected from an initial set of rates raising taxes
on income earners making more than $250,000 would have fallen far short of what
would be needed to close Illinois’ fiscal gap. Progressive income tax powers
combined with Illinois’ growing deficit and debts would have opened the door to
tax increases on the middle class and seniors’ retirement income.
During his daily COVID-19 briefing after voters rejected the “fair tax,”
Pritzker suggested he would pursue “painful” cuts to core government services as
well as income tax hikes on all taxpayers as deficit-closing strategies.
Pritzker did not mention alternatives, such as pension reform or other
structural spending reforms to the largest cost-drivers of the state budget.
Asking Illinoisans to pay more in taxes to receive less in services and provide
less support for families in need has been the trend in state government for the
past decade, driven by the ever-growing cost of Illinois’ worst-in-the-nation
pension crisis. Largely as a result, Illinois lost population for six
consecutive years due to outmigration and saw the nation’s worst population loss
over the last decade.
Springfield should not ignore the clear message Illinois voters sent when they
decisively rejected the statewide “fair tax” referendum: further tax hikes are
the wrong strategy to balance the budget. Moreover, indiscriminate cuts to
public safety and education would deprive vulnerable residents of services they
rely on and threaten to further derail Illinois’ weak economic recovery from the
COVID-19 recession.
Instead of doubling down on the same failed strategies that gave Illinois the
nation’s lowest credit rating, Springfield should send Illinois voters a pension
amendment to fix the root cause of the state’s overspending. The Illinois Policy
Institute’s budget plan, “Illinois Forward: A 5-year plan for balanced budgets,
declining debt, and tax relief,” presents a comprehensive path to fixing the
state’s finances while protecting both taxpayers and residents who rely on
essential government services.
Fixing the pension crisis is key to avoiding painful cuts to core services
Illinois’ pension crisis is the worst in the nation when compared to the size of
its economy.
Attempts to keep up with this unsustainable debt burden without reform have
already caused disinvestment in higher education, public safety, public health
programs, and vital services for the poor and vulnerable. Since fiscal year
2000, a 501% increase in inflation-adjusted pension spending was accompanied by
a nearly one-third decline in spending on a range of core services.
Crowd out of spending on services will worsen without reform. Pensions were
previously projected to consume just under $11 billion of next year’s budget.
Those costs will be even larger in the wake of investment losses owing to
COVID-19 related market volatility. One of Illinois’ five state pension systems,
the Teacher’s Retirement System, recently announced a $310 million increase in
costs over prior projections.
“If you set aside federally protected programs, court- ordered obligations and
our bond and pension debt, we would have to reduce discretionary spending in our
state by approximately 15% [to balance the budget],” Pritzker said according to
CBS 2 Chicago. He did not provide a reason why pension reform should be “set
aside” as a deficit-closing strategy.
“That’s 15% fewer state troopers. That’s 15% fewer students going to college.
Fifteen percent fewer working parents, receiving Child Care Assistance and 15%
less money for your local public schools, which likely means that your property
taxes will increase,” Pritzker continued.
Many of the programs hardest hit by pension crowd-out over the past decade
overlap with areas Pritzker is now warning may be targeted for further cuts,
including public safety and various family and parenting services.
Ultimately, balancing Illinois’ budget in the wake of the COVID-19 recession is
likely to require some cuts in the operating budget. The Governor’s Office of
Management and Budget estimated the budget deficit for the current fiscal year
2021 at $7.4 billion without the $1.2 billion in first-year revenue from the
progressive tax. The governor must propose a balanced budget for the coming
fiscal year 2022 in February and will face a deficit of similarly historic
magnitude.
But any budget cuts should be made with a scalpel, not a hatchet, approach,
prioritizing spending on the most efficient and vital programs.
The Budgeting for Results initiative was created in 2010 and intended to create
a “results-based” budgeting process, where measurements of program performance
and outcomes are used to make spending decisions. Unfortunately, Illinois
lawmakers have largely ignored program results data and continued to make
spending decisions using a “line item” approach, which uses the prior year’s
spending as a baseline for yearly increases without a systematic way of
measuring effectiveness.
The nonpartisan Pew Charitable Trusts has recommended results-based budgeting as
a strategy for prioritizing scarce resources during the pandemic and making
strategic budget cuts to balance public budgets amid declining revenues.
[ to
top of second column] |
A constitutional amendment to allow pension reform that preserves workers’
earned benefits and allows for changes in unaccrued benefits such as 3%
compounding automatic annual benefit increases would make the system more
sustainable and make pensions more secure. A “hold harmless” pension reform plan
developed by the Illinois Policy Institute would save the state roughly $2.4
billion the first year and more than $50 billion through 2045, while fully
eliminating the debt over that time.
Pension reform would ensure Illinois’ scarce resources are invested in programs
Illinoisans need most during the pandemic and in spending that delivers the best
return on investment for taxpayers. Any program cuts should be targeted at
inefficient or less immediately vital programs, rather than using a 15%
across-the-board approach.
Hiking flat tax 20% means doubling down on an already failed strategy to fix
state finances
Asked if he would now push for lawmakers to hike the the flat income tax on
everyone, Pritzker responded that “everything’s on the table.”
Income tax hikes are the wrong way to attempt to balance Illinois’ budget.
Voters clearly rejected income tax hikes when they said “no” to the governor’s
“fair tax” proposal. Moreover, recent income tax hikes failed to improve state
finances while harming Illinois’ economy.
From 2011 to 2018, Illinois’ net debt quadrupled to nearly $190 billion despite
a major income tax hike that brought in $37.4 billion in additional revenue from
fiscal year 2011 to 2017 and was made permanent thereafter.
Meanwhile, these tax increases have driven Illinois’ total state and local tax
burden to one of the highest in the nation. Illinois Policy Institute analysis
found the 2011 state income tax hike cost the state economy $55.8 billion in
gross domestic product, along with 9,300 jobs over four years.
Residents are voting with their feet, heading to states with lower taxes and
better managed finances.
Illinois has lost population for six years running, driven primarily by adults
in their prime working years leaving for other states. The most common reason
residents give for wanting to leave is the high tax burden, according to public
opinion polling conducted for NPR and the University of Illinois-Springfield.
Analysis from the Illinois Policy Institute has uncovered a weak housing market
and poor job opportunities as other core causes of the exodus, which are linked
to the tax burden.
Lt. Gov. Julianna Stratton, the second ranking member of Pritzker’s
administration, previously warned the administration would “consider raising
income taxes on all Illinois residents by at least 20%, regardless of their
level of income” if the “fair tax” failed at the ballot box.
However, Stratton also admitted the harms of hiking taxes in an already high-tax
state, saying, “We all know that our middle- and lower-income families cannot
withstand a 20% tax increase and it will only serve to deepen the dramatic
inequities that we already see across the state. It will drive out our residents
and it will drive out investment in Illinois.”
Those harms are real and should be enough reason for Pritzker to take income tax
hikes off the table.
Pritzker must fix Illinois finances without tax hikes or borrowing
Pritzker was right when he said, “Illinois’ fiscal problems haven’t gone away.
We now sit at a crossroads. Our state finances still require fundamental
structural change.” He articulated worthy goals for himself as governor, “I
promised to be a governor who balances the budget and pays the bills that my
predecessor left behind. I promised to make sure that our kids get a good
education that we invest in job creation and that we build a better future for
Illinois.”
But the only path to fixing Illinois’ finances through structural change and
achieving Pritzker’s other stated goals begins with constitutional pension
reform, which Pritzker has opposed to date.
Credit ratings agencies have been clear that reliance on budget gimmicks and
one-time measures will be looked at unfavorably and could cause a formal
downgrade to non-investment grade, or “junk” status. That means Pritzker and the
General Assembly cannot build a budget strategy entirely around additional short
term borrowing from the Federal Reserve or a potential federal bailout, as they
did for the fiscal year 2021 budget.
In June, Illinois became the first and only state to borrow from the Fed’s new
Municipal Liquidity Facility, issuing $1.2 billion in debt to cover operating
expenses in the fiscal year 2020 budget. The fiscal year 2021 budget Pritzker
signed in May authorized up to $5 billion in additional lending authority from
the Fed. But a reliance on further borrowing will not stop Illinois from
becoming the nation’s first junk-rated state. Investors are already treating
Illinois’ bonds like junk, according to Barron’s.
“We are looking to see to what extent Illinois addresses its budget gap through
recurring measures rather than just relying on borrowing or other one time
sources,” S&P Global Ratings lead Illinois analyst, Carol Spain, said in an
interview with Bond Buyer.
S&P warned in 2019 that a “practical reduction” in pension liabilities might be
the only way for Illinois to avoid a junk credit rating. That can only be
accomplished through a constitutional amendment.
The state may also need near-term assistance from the federal government to help
cover revenues lost to COVID-19 economic fallout. But blank check bailouts will
inevitably flow to debt and pensions, not services, and harm Illinois’ finances
by giving cover for further delay of needed reforms. U.S. Rep. Darin LaHood’s
Taxpayer Protection Act offers an alternative, providing state and local
governments with forgivable loans contingent on pension reform and sound budget
practices.
Under the Taxpayer Protection Act, Illinois would initially be eligible for an
estimated maximum of nearly $3.1 billion in aid. That aid should be combined
with pension reform, targeted budget cuts using outcome metrics, and other
structural spending measures such as reducing administrative bloat in education.
For decades, Illinois has asked its taxpayers to pay more in income and property
taxes to receive less in services. That was the status quo rejected by voters in
the “fair tax” referendum. Rather than promising more of the same, Pritzker
should commit to pension reform and structural changes that can balance
Illinois’ budget while respecting taxpayers.
Click here to respond to the editor about this article
|
