The Case For Illinois’ Graduated Income Tax Is Dishonest

By: Mark Glennon*

The case for the Fair Tax – a graduated income tax in Illinois – is being made so dishonestly that a detailed look is in order.

Supporters say it will plug Illinois’ fiscal hole, reduce property taxes, address our pension crisis, provide more funding for schools and more.

In fact, if Governor JB Pritzker’s Fair Tax proposal becomes law, Illinoisans will quickly discover they were duped into throwing more money at a doomed effort. The new revenue would barely dent our problems and only further enrage the Illinoisans who are already fed up and ready to leave.

Let’s start with the messages you’ve already been hearing, then look a particularly deceitful article published today in Crain’s by two prominent supporters of the tax hike.

The biggest whopper is being told by Think Big Illinois, the primary group supporting a progressive income tax for Illinois, whose backers include Pritzker. It’s the subject of my monthly article in Crain’s Chicago Business this week. Here’s what they’re claiming:

“Illinois is in a $3.2 billion financial hole. A Fair Tax could fix that and reverse the damage.”

If only the hole indeed were just $3.2 billion. Most Illinoisans of any political stripe would probably be happy to pay up and call it a day to fix our fiscal crisis, no matter how the burden was distributed.

But it’s preposterous – off by several multiples, depending on exactly what you choose to count.

Just the annual funding shortfall for the state’s five pensions alone is $4.7 billion per year. That’s based on the “actuarially determined contributions” contained in the most recent actuarial reports, and they’re based on assumptions widely regarded as far too optimistic.

But the new tax would raise only $3.4 billion per year. (That’s the administration’s claim, though the estimate has been heavily criticized as too optimistic). In other words, the new tax wouldn’t come close to solving the state’s pension crisis, never mind the hundreds of local pension funds across the state.

Or consider additional money needed under the new school funding formula. It now turns out that current funding is already $7.3 billion short of the “evidence-based” formula in the new law, according to the left-leaning Center for Tax & Budget Accountability, which had a major role in drafting it. That alone is over twice the new revenue claimed by graduated income tax supporters.

The biggest reason why the $3.2 billion “hole” is so dishonest is that it’s based on phony government budget accounting. Do you “balance” your budget by running up your credit card debt, selling the furniture in your home or raiding your spouse’s bank account? No problem under those government budget standards.

Spendthrift, dishonest politicians routinely exploit the myth, and it’s happening again. This can’t be said often enough: Government budgets mean little because they are just annual cash spending plans. They ignore growing debts and count borrowed money, asset sales and raids on segregated funds as income.

The true hole, I wrote in my Crain’s article, would be roughly $10 billion if you instead measure Illinois’ “hole” on a proper, accrual basis. That happens to be about the same estimate referenced in a Wall Street Journal article last week that appeared after I wrote my article. The Journal cited work by a JP Morgan analyst who figure that it would take roughly $10 billion more simply to begin making proper payments on pensions, pensioner healthcare and bonded debt.

Add in the other spending promises Pritzker made during the campaign and estimates go up to as high as $19 billion. Actual accrual-based losses, as shown in the state’s audited financial statements, have averaged $12.5 billion over the last 10 years.

Most of that true hole is those growing, unfunded, pension and related health care liabilities. And the state doesn’t even pay interest that effectively accrues those liabilities. If it did, that alone would easily consume the $3.4 billion of projected revenue from the graduated income tax. It’s like a reverse mortgage, and the Fair Tax couldn’t fix even that.

Now, let’s look at an article by Frank Manzo and Robert Bruno in yesterday’s Crain’s. They also appeared on Fox Chicago over the weekend with my colleague, Ted Dabrowski, discussing the same matters.

They start by totally ignoring both the true fiscal hole and actual tax proposal on the table. The structural deficit, they claim, is an almost negligible — $1.2 billion – far less than even the Prtizker Administration says. And a “conservative estimate” of new revenue they say, would range between $3 billion and $5 billion per – higher than Pritzker claims. So, they say, under a graduated tax the deficit would be “eliminated in its entirety. Gone.” But they entirely ignore the state’s plunge into debt that proceeds each year at a pace many multiples bigger than their meaningless “structural deficit” claim.

While their claim about eliminating the deficit is outrageous enough, they’d have us further believe enough money would be left over to fund a 10% reduction in residential property taxes help for the pensions and another $250 million per year for education and infrastructure. That property tax relief alone would cost another $2 billion per year.

Oddest of all is their claim that the tax increase will spur new job creation and grow the economy. It’s that simple? Just raise taxes and the economy grows? Wouldn’t it be nice if tax and spending policy were so easy?

It’s not. Manzo and Bruno base their claim, first, on the notion that the middle class spend a higher portion of their income than the rich, so moving the tax burden towards the rich frees up spending, which is stimulative. “Working and middle-class families are more likely to spend their tax cuts in the economy,” they say.

That would be true, but it’s not what Illinois is considering. Pritzker’s proposal would only provide for about $180 million in tax reductions for the lower income brackets. However, it would increase taxes on the top brackets by $3.6 billion. Manzo and Bruno’s logic is therefore specious.

Manzo and Bruno also claim the tax increase would stimulate jobs and the economy because the new revenue would be spent by the state on things like additional investments in education and infrastructure, which they say are proven tools for creating broad-based prosperity. That might usually be true. Classical Keynesian economic theory, if you accept it, would say additional government spending matched dollar for dollar by a tax increase is stimulative. Increased spending without new taxes – deficit spending – is even more stimulative.

But, again, that’s not what Manzo and Bruno themselves say would be done with the new money. It would be used first for deficit reduction, they say. That would be contractionary – Keynsian stimulation in reverse. And they’d have another $2 billion go towards property tax relief. That would be a swap, not additional government spending (though the homeowners getting property tax relief might indeed spend more of their savings than the high income taxpayers who provided the relief).

Where would the Pritzker Administration actually spend the new revenue? Realistically, the bulk would probably go into pensions. That means it goes into the pension funds, not greater pension spending, so it would have negligible effect on the economy. Much of it would probably also go towards paying down the state’s unpaid bill backlog, currently about $8.1 billion. Again, that’s not new government spending but debt reduction that would not be stimulative.

That leaves the subject of fairness – that the middle class deserves tax relief and the rich should pay more. I don’t dismiss that rationale out of hand because I personally regard inequality as perhaps the greatest challenge of our age.

But play with the calculator provided by Fair Tax proponents and you will see that the relief to be offered to the middle class is small – typically two or three hundred dollars. Their total tax relief would be just $180 million, as discussed above. In other words, call the Fair Tax proposal for what it is – a $3.6 billion tax increase on top earners, not a redistribution.

Many Illinoisans will be fine with that, but most know there’s much more to the story. They know tax increases with no reforms don’t work. They know taxpayers and employers are fleeing. They know that addressing inequality through state tax increases can make the state less competitive. They know their leadership lies incessantly about our problems. Those who don’t know soon will, when they see the false promises of the Fair Tax proposal play out.

I don’t rule out that Illinois, at the end of the day, might temporarily need more revenue. But that day must begin with drastic reforms, dozens of which we’ve detailed here, including a state constitutional amendment to permit real pension reform. Those reforms must come first or more and more Illinoisans will know their tax dollars are going into something like those recently published first ever pictures of a black hole.

*Mark Glennon is founder of Wirepoints.