Sad to say, nothing they’re doing or talking about in the General Assembly will have a significant impact on the state’s chronic budget crisis.
Not draconian Medicaid cuts, not possible pension cuts or casino expansions. The legislature is barking up the wrong trees, and doing it over and over.
That’s because the state doesn’t have a spending problem. In real terms, Illinois has been steadily cutting spending on education, human services, health care, and public safety for the past decade. Medicaid is not the problem: general revenue funds going to Medicaid are down over the past five years.
According to Ron Baiman of the Center for Tax and Budget Accountability, Illinois is one of the nation’s wealthier states, looking at the state’s gross domestic product per capita. But it has been one of the nation’s lowest-spending states, looking at state spending as a percentage of GDP.
So the problem isn’t overspending, and cutting doesn’t get us closer to a solution. The problem is a regressive tax system that doesn’t tax where the money is.
Illinois has one of the most regressive tax structures in the nation. As noted here last year, the bottom 20 percent of households pays twice as much of their income in state and local taxes as the top 20 percent does.
Even the flat income tax is regressive, since it imports all the federal tax code’s loopholes; of the current nominal rate of 5 percent, households earning over $1 million a year pay an effective tax rate of just 2.1 percent – the same as households earning over $10,000. The squeeze is on the middle.
And especially with the surge of income inequality in recent decades, that means the state asks more and more from people who are doing less and less well, and fails to capture the gains of economic growth, which are increasingly found at the top.
It can’t go on forever. At some point Illinois leaders are going to realize there’s no alternative to a progressive income tax. The constitution, which mandates a flat tax, will have to be amended.
All our neighboring states have progressive systems – and that’s the reason their budget problems are so much less than ours. If we took Iowa’s income tax rates and applied them to Illinois’s tax base, we’d raise $6 billion more a year – and 54 percent of taxpayers would get a tax cut averaging 24 percent, according to CTBA. If we took Wisconsin’s we’d raise $3.6 billion more a year and cut taxes for more than half our residents.
The Illinois constitutional amendment will have a straightforward appeal: nearly all taxpayers’ rates will go down.
CTBA has fashioned a proposal for a progressive tax system for Illinois that raises an additional $2.4 billion yearly (even after allowing for increased tax avoidance by wealthy taxpayers) and reduces the tax rate for 94 percent of taxpayers.
Everyone earning under $150,000 would get a tax cut. Starting to sound good?
It’s not even very tough on the wealthy; CTBA figures the effective tax rate (after deductions, credits and offsets) would top out at 6.3 percent for those earning over a half million a year.
There’s other money the legislature is leaving on the table, as it cuts public services to the bone. A restructuring of the corporate income tax in 2001 – an unsuccessful attempt to encourage job growth — means most Illinois corporations pay no income taxes.
And an antiquated sales tax which applies to goods but not services – so if you buy a lawnmower and gas to mow your own lawn, you pay a sales tax, but if you hire a lawn service you don’t – costs the state between $500 million and $1 billion a year.
Then there’s corporate welfare – an area in which Illinois is a leader. The Responsible Budget Coalition identified six corporate tax loopholes which don’t make economic sense — and where Illinois departs from federal policies and practices in other states — costing Illinois nearly $700 million a year.
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