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Illinois Gov. J.B. Pritzker has tried to sell his signature
policy proposal, the progressive income tax amendment, as a fix to the state’s
chronic budget deficits and ever-rising debt burdens.
But recent reports from credit rating agency Moody’s Investors Service show why
the so-called “fair tax” would fail to fix the state’s financial problems while
exposing retirees and the middle class to higher taxes.
“The ‘Fair Tax’ proposal is unlikely to be the last of the state’s
revenue-raising initiatives, given the scale of its need for additional fiscal
capacity,” Moody’s wrote in a report released Oct. 1. “Additional revenue
options Illinois could pursue include taxing retirement benefits and applying
the state’s sales tax to a greater number of service transactions.”
All 32 states that have adopted a progressive tax structure tax retirement
income in some form. And Illinois state Treasurer Michael Frerichs said in June,
“One thing a progressive tax would do is make clear you can have graduated rates
when you are taxing retirement income.”
Without structural reforms to balance the budget and reduce debt burdens,
Illinois politicians will likely continue to ask taxpayers to pay more to
receive less in services.
This has been the trend of the past two decades, as Illinois’ pension crisis
drove a 32% drop in funding for essential services despite rising tax burdens.
If voters on Nov. 3 approve the “fair tax” amendment and scrap the current flat
tax protection, they’ll be granting state politicians permanent new taxing
powers that make it easier to raise everyone’s taxes without fixing the cause of
the state’s unending demand for more revenue.
Accounting for slower economic growth after the COVID-19 recession, the initial
“fair tax” rates that would take effect if voters approved the progressive tax
amendment would raise $3 billion. Illinois has a $6 billion deficit for the
current budget year, a backlog of unpaid bills worth nearly $8.1 billion as of
Oct. 22, and will have to make larger than expected payments next year for both
operating funds borrowing and pension contributions. According to the Illinois
comptroller, debt service payments on principal alone for borrowing used to
paper-over holes in the current year’s budget will cost $1.23 billion next
budget year, plus any interest.
Moody’s estimated in a report issued Sept. 8 that Illinois pension debt at the
start of fiscal year 2019 was nearly $230 billion. Illinois had the highest
pension debt-to-GDP ratio in the nation for the fourth consecutive year, with
pension debt equal to 25.6% of the state’s total economic output.
As detailed in an original report from the nonpartisan Illinois
Policy Institute, economic fallout related to COVID-19 will further increase
pension debt and the annual costs of the state retirement systems. The
combination of lower expected government revenues and lower investment returns
on pension assets will drive the state’s chronically mismanaged pension system
closer to total collapse. Moody’s estimates Illinois’ pension debt for fiscal
year 2020 will jump to an all-time high of $261 billion.
Illinois already spends the most in the nation on pensions as a percentage of
the state’s revenues, but it also has the largest gap between what it pays and
what it would take to adequately fund the systems. Moody’s calculates that
Illinois would need to pay an additional 5.6% of its revenues towards the
pension system, on top of the current 16.1%, just to “tread water” or prevent
the debt from increasing each year. [ to
top of second column] |
Many states contributed more than the tread-water
level in 2019, according to Moody’s. Among the top five states with
the most pension debt, only Illinois and New Jersey failed to make
actuarially sufficient contributions. Illinois’
pension system requires deep structural reforms to prevent the debt
from continuing to grow, driving more tax increases and service
cuts. Raising more money from taxpayers to throw into the broken
existing system cannot solve the problem. Only Connecticut – the
last state to adopt a progressive income tax – spends more of its
budget on “fixed costs.” Fixed costs represent spending on debt
service and employee retirement benefits, including both pensions
and retiree health care.
Connecticut’s progressive tax failed to solve that state’s budget
problems but did lead to a 13% jump in tax rates for middle-class
taxpayers, 35% property tax hike, 362,000 jobs lost from the labor
market, increase in poverty and contributed to many seniors fleeing
new taxes on their retirement.
Illinois currently spends 27.3% of all the money it collects from
taxpayers on debt service and government worker retirement benefits.
Moody’s projects that percentage could rise to between 36% and 39%
by fiscal year 2024, depending on how quickly state revenue
collections recover from the COVID-19 recession. Moody’s notes 30%
fixed cost spending has been considered Illinois’ “highest
sustainable level,” so it is about to fly past its breaking point.
Moody’s also warned against any plan to reduce pension contributions
in the near term by stretching out or delaying pension payments
through schemes known as “reamortization.” Pritzker has endorsed
these types of pension gimmicks in the past, including delaying
payments and swapping bond debt for pension debt, but backed off
these plans after pushback from ratings agencies. Such gimmicks
increase the cost of the systems in the long run while allowing
politicians to dodge fixing the structural problems, leaving their
successors to figure out whether there are any solutions left.
Political games and delaying action on true reform helped create
Illinois’ pension crisis in the first place. Yet with the state’s
budget in as bad of shape as it’s ever been, lawmakers unwilling to
address structural spending reform will likely be tempted to look at
a combination of these unsound gimmicks and further tax increases.
If voters approve Pritzker’s “fair tax” amendment, they’ll be
granting politicians new powers to target the middle class and
retirees with tax hikes. The fact that the initial rates hitting
incomes over $250,000 fall far short of raising the revenue needed
to close the fiscal gap, as Moody’s reports, makes it virtually
certain that they will raise taxes on those making much less.
If instead voters reject the progressive income tax, they can send
Springfield a clear message that taxpayers are struggling with their
own economic challenges. They can say they are unwilling to pay more
to cover up politicians’ financial mismanagement.
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