Print Friendly, PDF & Email

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.

 

newest oldest most voted
Notify of
Freddy

Mark and Ted. I am trying to look at this pension mess from a different view. I agree that they were overpromised and underfunded but over the same timeframe of say 10-20 years salaries were OVERFUNDED. During the downturn when many people were losing their jobs and homes to foreclosure many if not most school districts and public employees were getting raises due to multi-year contracts. Tax rates and tax bills were still going up because of PTELL because many were getting 2-3-4% annual increases which was way above what the private sector was given during that period. People without… Read more »

world with end

For teachers, 40 percent is too low of an estimate for 10-15 years if you prorate the step increases along with the contractual raises. Also, remember that teachers, at least Chicago suburban teachers, start at over 50K.

Freddy

The Palatine school district signed a 10 year contract in 2016-2026 with raises of 2.5 to 4% per year plus little if any increases in health care cost which we all know will rise substantially. This should be the longest school contract in Illinois. Most contracts are 2-3 years with retroactive increases when ratified regardless of how long they take to negotiate.

Brian S.

So long as the exodus that is Illinois continues the states financial problems can not be fixed without some level of bankruptcy, and restructuring of the pension benefits. It’s simply not mathematically possible. It’s one thing to have a note due, it’s another to lose the revenue required to pay for it. I can appreciate all the ideas and measures that smart, well educated people bring to the table but the fact still remains: it takes money to solve this problem that simply does not exist. As the tax burden the state continues to impose increases, (not just property taxes)… Read more »

nixit

If the middle class spend a higher portion of their income than the rich and moving the tax burden towards the rich frees up spending for the middle class, why tax the middle class at all? Shouldn’t they be proposing a 0% rate for all income up to $100,000? That would certainly free up spending.

NB-Chicago

Mark–what do you think of berg article, and others that says real aim is to change const wording to allow taxing income multiple ways? https://www.thetelegraph.com/opinion/article/Op-Ed-Lawmakers-crack-open-Pandora-8217-s-box-13763881.php?RelatedContentIds=Article-BBVbLHD,Article-BBVgrrU

Jake

There are so many people in Illinois that are government employees or related to government employees or are getting government contracts that they won’t care if it’s all a fairy tail. As long as they get there’s they don’t care. Let the “rich” guy pay for it — you know those millionaires making $120,000.

Riverbender

Add to that group the members of the Free Stuff Army and a very formidable voting block is formed meaning that the only probable cure is for the taxed to move elsewhere.

Just don’t imply that any of the Free Stuff Army are Illegal Aliens or you will be a racist. Doesn’t apply to me because I’m white and by birth I’m a racist.

debtsor

It’s more than just the Free Stuff Army. It’s the progressive and liberals and democrats who hate Republicans and Trump. I personally know people who never vote but showed up to the 2018 mid-terms to vote straight ticket democrat. And it showed too, because 800,000 more people showed up to vote in 2018 than 2016 and all of them voted Democrat. They hate Trump so much they are blinded by everything else.