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 Optimism, bipartisan solutions to Illinois’ chronic problems
were promised by Illinois Gov. J.B. Pritzker in his first budget address on Feb.
20, but take a close look and there are serious pitfalls along Pritzker’s chosen
path.
Illinois should not repeat past mistakes, such as damaging a weak economy with
tax and fee hikes. It should not, again, increase debt and push pension payments
into the future.
Illinois leaders should have learned from these past mistakes. Pritzker has good
goals: sound finances, a growing economy and tax relief for working families.
But then details of his budget plans for fiscal year 2020 sabotage those goals
when they don’t need to.
Pritzker’s address presented a false choice to lawmakers and residents. The
governor claimed there were only two ways to close the state’s daunting $3
billion deficit: massive tax hikes or slashing core government services such as
education, public safety and social services.
That’s not true. A third way exists: Illinois can make structural spending
reforms to the core cost drivers of its overspending, protect essential services
and reduce the tax burden on Illinois residents. The Illinois Policy Institute’s
five-year plan, Budget Solutions 2020, consists of commonsense reforms that have
received bipartisan support in the past. Structural spending reform would enable
lawmakers to balance the state budget immediately. In fewer than five years,
they could eliminate the state’s bill backlog and finance a deficit-neutral
income tax cut. Contrary to the governor’s claims, this can be accomplished
without cuts to services that provide value to Illinois residents.
Pritzker’s false choice is a budgetary gimmick that’s been used before
Past Illinois governors have presented a similar false choice between core
service cuts and tax hikes.
The Illinois State Budget Law requires the governor to propose a budget in which
expenditures do not exceed revenues expected to be collected under current law.
In other words, governors are required to propose balanced budgets without
pretending they are about to receive a tax hike. As a result of this
requirement, governors who favor tax hikes in Illinois sometimes propose “not
recommended” budgets, which include no new revenues and therefore meet the
statutory mandate, and “recommended” budgets that include tax hikes. Former Gov.
Pat Quinn proposed two budgets for fiscal year 2015, one in which the
then-temporary income tax hike was made permanent and an alternative scenario in
which Quinn exaggerated the ramifications of allowing the tax hike to expire by
claiming it would result in dramatic cuts to core government services.
Pritzker relied on this same false choice gimmick to meet his statutory
requirement. On page 32 of the formal budget proposal document, the Pritzker
administration says that without $1.1 billion in tax and fee hikes, all spending
would have to be cut by 4 percent across the board to balance the budget,
excluding debt service, pensions and employee health care costs.
The first thing to note about Pritkzer’s cuts-only option is the hypocrisy of
its vagueness. Former Gov. Bruce Rauner infamously included nearly $4.6 billion
in savings from a vague line item titled “working together on ‘grand bargain.’”
This was widely derided as smoke-and-mirrors budgeting, lacking the specific
information necessary to make a budget work in practice. Pritzker himself took a
shot at the “working together” line item in his budget speech, pausing for
laughter and applause. And yet, the governor’s 4 percent across-the-board cuts
include no detail about the statutory changes necessary to achieve them, and
represent the exact same sort of smoke-and-mirrors accounting gimmick for which
he criticized Rauner.
The second thing to note about the cuts-only option is that Pritzker uses
sleight of hand to take two items off the table which must be addressed in order
to achieve a balanced budget with no tax hikes. It makes sense that debt service
would be exempted from cuts – failing to make payments on debt is default, and
would seriously harm the state’s credit rating. But the governor and General
Assembly together have the power to initiate reasonable changes to pension costs
and government worker health insurance. These two items are the fastest growing
areas of state spending.
To create a balanced budget with no tax hikes, Pritzker simply needs to let the
math lead his analysis and be willing to make difficult political decisions.
Since fiscal year 2000, state spending on pensions has grown more than 677
percent, and spending on government worker health insurance has grown nearly 244
percent. Meanwhile, spending on K-12 education, often touted as a top priority
by Illinois politicians, is up slightly less than 73 percent. All other
spending, including social services for the disadvantaged, is up just over 18
percent. Total spending has risen by nearly 68 percent.
Pritzker’s proposed budget leaves untouched the two biggest
cost-drivers in the state’s finances, offering cuts to a vast array of other
programs and services as the only alternative to a new wave of tax hikes.
But the budget proposal is a bad deal for taxpayers for five other reasons as
well.
1) Pritzker’s spending increases make the deficit harder to solve
The first step to getting out of any hole is to stop digging, but Pritzker has
so far grabbed a bigger shovel.
According to projections from Pritzker’s administration, the structural deficit
for fiscal year 2020 is $3.2 billion. This hole is $440 million more than
projected in November by the Governor’s Office of Management and Budget, or GOMB.
However, details of a report from the Pritzker administration show the deficit
grew as a result of the administration’s plans to spend $440 million more than
baseline projections on social services, education and public safety.
Pritzker also agreed to hand out at least $100 million of automatic raises to
most Illinois state workers who belong to a union and pushed through a $15
minimum wage hike, set to ramp up over a number of years, which will cost the
state $1.1 billion once fully implemented and more than $82 million for his
first budget year.
2) Pritzker’s proposed budget is not truly balanced
The governor made a dubious claim that his proposed budget is balanced on a cash
basis, relying on a lax accounting standard that hides the true size of
deficits.
After claiming to have inherited a $3.2 billion deficit, the governor’s proposed
budget takes only two main actions to narrow it: $1.1 billion in new revenue for
tax and fee hikes, and shorting the pension funds by a little over $1 billion
for a total deficit reduction of a little over $2 billion. From the details of
the document, it is difficult to discern how the proposal closes the remaining
$1 billion deficit.
Two major credit rating agencies have said the proposal does not achieve true
structural balance.
Fitch Ratings has said the proposal “would not materially address the state’s
structural budget issues” and that Illinois’ credit rating would drop if the
plan were enacted as proposed. S&P Global Ratings said the proposed budget
“punts measures to address fiscal progress to future years” and called the
budget only “precariously balanced.”
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3) Increased taxes and fees will harm the economy
while failing to raise sufficient revenue to solve Illinois’
problems
High taxes are the No. 1 reason Illinoisans cite for wishing to
leave the state. Outbound Illinoisans have generated five
consecutive years of population loss.
Still, Pritzker’s preferred budget would ask
taxpayers and employers to pay $1.1 billion more with no structural
spending reform. Specifically, Pritzker wants to raise:
-
$390 million from taxing Medicaid providers
-
$175 million from a delinquent tax payment
incentive program
-
$170 million from selling marijuana licenses at
$100,000 per license (for comparison, a liquor license is only
$750)
-
$89 million by expanding video gambling in the
state and making the tax higher on larger operators
-
$12 million by legalizing online sports betting
and selling licenses, which would increase to $200 million in
future years
-
Between $19 million and $23 million from a
statewide tax on plastic bags at grocery stores
-
$75 million by removing a tax credit available
to retailers, effectively increasing their taxes
-
$55 million from increasing taxes on cigarettes
-
$10 million from a new tax on e-cigarettes and
vaporizers
As noted by Fitch, roughly a third of the proposed
new revenues are one-time sources. This means they cannot be used
for future budget proposals to close long-term deficits.
Additionally, several of the revenue sources are “sin taxes” – such
as the taxes on gambling, various types of cigarettes and marijuana
– which would disproportionally hit low- to middle-income
Illinoisans and contradict Pritzker’s goal of a fairer tax system
that relieves the burden on the poor.
4) Proposed pension solutions will hurt Illinois’ credit rating and
increase unfunded liabilities
Credit rating agencies have particularly criticized Pritzker’s
pension plan.
As previously explained by the Illinois Policy Institute, proposals
to issue pension obligation bonds and stretch out the payment ramp
are not new ideas, but would repeat the past mistakes that helped
create Illinois’ $134 billion in pension liabilities and poor credit
rating. Although Moody’s Investors Service declined to weigh in on
the full proposal, preferring to wait for an enacted plan, an
analyst did make clear that including these two pension gimmicks in
the budget would be a credit negative.
The biggest budgetary effects of Pritzker’s proposal come from
extending the payment ramp by seven years, reducing the fiscal year
2020 pension contributions by $878 million, and extending a
cost-of-living adjustment buyout program that is used to justify a
further $125 million reduction. In total Pritzker wants to short the
pension funds by more than $1 billion relative to the expected
contribution.
Previously, GOMB estimated the costs of extending the pension
payment ramp by 10 or 20 years. Assuming proportionality with those
estimates, Pritzker’s extension would increase liabilities by $105
billion, not accounting for other pension changes.
5) A constitutional amendment to allow a progressive income tax hike
will do particular harm to an already struggling economy without
solving the state’s core problems
Pritzker has characterized his current budget as “austere” and a
“bridge” until a progressive income tax will allow him to spend
more. The governor also repeated a number of common myths about the
progressive tax. The reality is that states with progressive income
taxes see slower growth in jobs, wages and GDP, with no meaningful
impact on income inequality.
While sold as a tax on the rich, progressive tax plans tend to be a
Trojan horse for middle class tax hikes.
The last state to switch to a progressive income tax was
Connecticut. Since the switch, the median family’s income taxes are
up 13 percent, property taxes are up 35 percent, and poverty has
increased by 47 percent. Meanwhile, Connecticut continues to
struggle with problems very similar to Illinois’, including
unbalanced budgets, massive unfunded pension liabilities and
residents moving away.
A better way to accomplish Pritzker’s stated goals: economic growth
and protecting taxpayers
Aspects of Pritzker’s budget address are praiseworthy.
First, the governor adeptly laid out the scope and severity of
Illinois’ fiscal crisis, which is the worst in the nation. The
Prairie State’s budget crisis is decades in the making – the state
has not had a balanced budget since at least 2001. It will take
years to achieve healthy finances and a good credit rating, which is
currently the worst in the nation at just one notch above junk.
Second, the governor acknowledged the merits of bipartisanship and
taking ideas from all sides of the debate. Pritzker declared that
budgets under his tenure would be made “by debate and compromise”
and that “[w]e are all here, Democrats and Republicans, with the
common desire to serve the people of our state well. And we do that
better when we talk to each other, and more importantly, listen to
each other.”
Finally, and most importantly, Pritzker recognized that the rising
cost of pensions is crowding out core spending priorities. In the
speech, the governor correctly pointed out that when the current
pension payment ramp was put in place in 1996, it was projected that
Illinois would be spending just $4.9 billion on pension
contributions in fiscal year 2020. Instead, the fiscal year 2020
payment was certified at $9.1 billion this year, which is $4.2
billion, or nearly 86 percent, higher than expected.
Unfortunately, the detailed budget documents released in conjunction
with Pritzker’s speech do not match his rhetoric. Pritzker’s
laudable goals – healthy state finances, a strong economy and a tax
cut for the middle class – cannot be achieved by the means he’s
proposed. Many of his proposed policies will undercut his goals and
push Illinois in the wrong direction.
Instead, Pritzker should look to structurally reform Illinois’
spending to address the largest cost drivers of the state’s fiscal
problems: government worker health care costs and pension benefits.
The Illinois Policy Institute shows how necessary, commonsense
reforms can be achieved in its recently released “Budget Solutions
2020: A 5-year plan to balance Illinois’ budget, pay off debt and
cut taxes.”
Lawmakers have two options ahead of them: They can continue to rack
up debt and pursue tax hikes that will further damage the state’s
economy, or they can break with past practices and pursue
responsible budgeting that protects both taxpayers and core
government services.
It’s past time to end the state’s failed status quo, put the state
on a path to deliver real tax relief and ensure a sound fiscal
future for all Illinoisans.
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