By: Ted Dabrowski, Mark Glennon and John Klingner
The latest comprehensive budget proposal for the State of Illinois is out. It’s from the Civic Committee of the Commercial Club of Chicago. Like the Civic Federation, the Civic Committee is comprised mostly of business-oriented members and has a proud history standing up for fiscal responsibility.
But we are genuinely baffled by its new proposal. We see very little in it that would gain support of conservatives or liberals. Nor would it meet basic commitments of the Pritzker Administration, which are supported by most members of the General Assembly.
We’ll summarize the proposal, then provide our viewpoint.
Summary of Primary Elements of the Proposal:
- Increase the personal income tax rate to from 4.95% to 5.95% (estimated revenue: $3.7 billion);
- Tax retirement income; increase the 65 and over exemption to $15,000 (estimated revenue: $1.9 billion);
- Increase the corporate income tax base rate from 7% to 8% (estimated revenue: $300 million);
- Expand the sales tax base to include a set of consumer services (estimated revenue: $500 million);
- Change state pension contribution ramp by putting more money in sooner.
- Reform healthcare plans for current State employees (estimated savings: up to $500 million);
- Implement a new retiree healthcare plan for new employees;
- Reduce State spending through operational improvements (estimated savings: $1 billion);
- Eliminate the Estate Tax (estimated revenue loss: $290 million)
- Eliminate the Franchise Tax (estimated revenue loss: $205 million);
˗ $6 billion in net new taxes. Having just completed a tax increase of over $5 billion and with Illinois’ total tax burden already among the highest in the nation, the exodus of taxpayers and employers would escalate rapidly under this plan, ultimately backfiring by shrinking the tax base. Moody’s most recent credit report highlights out-migration as one of the top three credit issues facing Illinois.
˗ Local fiscal issues ignored. Illinoisans will know the $6 billion of new taxes is just the start because the budget proposal ignores the fact that Illinois residents face the burden of multiple, overlapping tax jurisdictions, which are also broke. The Committee’s failure to demand statewide reforms mean tax hikes would also be the solution for every other local government in the state. Chicagoans, in particular, would be hard hit by several overlapping taxing districts. They are on the hook for local unfunded pension debts that are 1.35 times larger than their individual share of the state pension problem.
˗ New taxes to be painful. Each of the proposed new or expanded taxes would hit the poor and working class hardest – particularly expansion of the sales tax and expansion of the income tax to retirees. Corporate taxes, too, are ultimately born by people. Each of those, plus the broad increase in the state’s flat income tax, would run contrary to Governor Pritzker’s promise of tax cuts for all but the wealthy.
˗ No pension reform. Not a penny of pension reform is proposed, nor is a constitutional amendment to allow for reforms called for. That’s in contrast to what lawmakers and the Illinois Attorney General told the public and courts five years ago, when they said benefit cuts were essential.
˗ Operational savings won’t happen. The plan claims $1 billion in unspecified operational savings. That’s like perennial claims about savings from cutting “waste, fraud and abuse” as if that’s a line item in a budget. Such cuts don’t materialize. In fact, with public unions now in full control of Springfield, we should expect operational inefficiencies to worsen.
˗ No predicate of fiscal reforms and business-friendly reforms. We believe Illinoisans will reject plans that do not contain sweeping structural reforms that reduce the burdens on ordinary Illinoisans, employers and local governments. That includes ending unfunded mandates strangling municipalities, reducing workers’ compensation costs, easing collective bargaining restraints for all units of government and much more. The Committee’s plan doesn’t include any of these reforms.
˗ New revenue projections not dynamic. Revenue from the new taxes proposed do not appear to account for lost population and increased tax avoidance that results. We believe those results would be so severe that any tax increase will backfire in the long run by shrinking the tax base. Accordingly, the projected new revenue will not materialize in the long run.
˗ Pension numbers suspect; taxpayers kept on steep ramp up. The plan apparently supposes that an additional $2 billion of taxpayer contributions to pensions would put them above “tread water” level by around 2028. In other words, unfunded liabilities would continue to rise until then. We believe this needs further analysis. In any event, the plan would have taxpayer contributions roughly doubling by 2045, when they would begin to drop, supposedly.
˗ Healthcare for state retirees left on a pay-as-you-go basis. The state faces a staggering $73 billion of unfunded liabilities for state retiree healthcare. It must be reduced and amortized, but reduction will require a constitutional amendment that the proposal does not call for.
˗ No funding for Governor Pritzker’s promises. While we don’t think they were all feasible under any circumstances, Pritzker was elected with promises of a tax cut for most Illinoisans, universal health care, early childhood education, better funding for schools, local property tax relief and more. With none of that spending included in the Committee’s proposal, we believe the plan is not viable under this administration.