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Illinois Wed Jun 17 2009

Legislators Need to Move Beyond Denial

The state of the Illinois budget continues to be at the first stage of grief, denial. What we are denying is that some form of tax increase is inevitable.

What Illinois has, and would have no matter who is governor, is this: (1) a structural deficit, because our current tax structure just doesn't generate enough to fund the total state budgets and pension obligations at the rate we spend; (2) years of avoiding this through creative accounting such as fund sweeps and, in effect, using the pension funds as a credit card; (3) an overall tax system that is regressive, and arguably one of the more regressive in the nation; and (4) a huge revenue shortfall due to the recessionary economy, which has dramatically lowered revenues from income, from sales, and from the transfer of real estate. This last is what tipped the deeply troubling into the truly alarming.

The unenviable task of proposing a tax increase to address the years of "dine and dash" fiscal policy compounded by current shortfall crisis fell into Pat Quinn's lap immediately upon taking office. Those who would prefer some other governor - whether a Republican, Lisa Madigan, or the remaining Blagojevich backers - have had a field day blasting first "Quinn's tax increase" and then "Quinn's budget cuts." But the math is the math and the facts are the facts. If Lisa Madigan was governor, in order to balance the budget she would be proposing a tax increase, or budget cuts, or both. So would any Republican governor.

The governor does not pass a budget. The governor sets the playing field by proposing a budget. You can fault what you don't like in Quinn's proposal, and many have, but at least he pushed out the paper he needed to push out. That was back in March.

It's then up to the legislature to pass a budget, and send it to the governor. The legislature this session failed to do that. Failed. All we have in place is a half-measure.

Faced with that, Quinn had two choices: continue to spend at the current rate, on the wish and hope that new money will magically appear somewhere down the line, or begin draconian cuts. The first option, as Senate president John Cullerton said this week, would have been "incredibly irresponsible."
So we now face the prospect of slashes to the operating budget that most agree will be devastating to service providers, especially in areas that serve the most vulnerable of our population. Predictably, and justifiably, howls and protests are starting to arise; hundreds gathered at the Thompson Center yesterday and more are expected tomorrow, June 19, with a rally starting at 11 am.

The reality is this: Even the Civic Federation, which "rejected" the governor's proposal, concedes that an income tax increase from 3% to 4% in the individual rate, and adding 1.6% to the corporate rate, is necessary, even if all the cuts they argue for are made. Quinn proposed a 1.5% increase. The Illinois Senate proposed a 2% increase, which is what the more Keynesian and state-employee-oriented groups, such as CTBA, propose.

So the playing field is defined. No responsible analysis has come forward saying we can balance the Illinois budget, and begin to right the pension ship, just with responsible cuts, without at least a 1% increase in the state income tax - which, if Quinn had proposed it, would be labeled a "25% tax increase."
Some of this is word games with numbers. Is a 1.5% increase, from 3% to 4.5%, a "50% tax hike"? Well, in a sense yes, because 4.5 is 50% more than 3, but it's still only 1.5% of taxable income; in reality no one will see their taxes go up by that much, because of exemptions. If you have $50,000 in income and $5,000 worth of exemptions, your tax is 3% on only 45,000, not 50K. So the income tax portion is really not even 3% right now.

Since the legislature has gone into overtime, 3/5 are now needed to pass a budget bill, which means that it can't be done just with Democratic votes. That brings the Republicans to the table, and the cynical would say that that was done on purpose, so that the GOP can't just hang back and label the increase a "Democratic tax hike."

Since a tax increase is unpleasant but just plain necessary no matter how you slice it, the time has come to move beyond denial and toward acceptance. Responsible leadership has to agree with the governor and the Senate that some increase is necessary. The Republicans have to accept the unpleasant fact that they are going to have to share in this responsibility.

Even a balanced budget will leave longer-term issues unaddressed. Any combo of income tax rate increase and increasing exemptions will be an unsatisfying variation on a two-bracket theme. Two brackets is too crude and will gore someone's ox no matter what. A truly progressive income tax requires amending the Constitution; when will we see the courage for someone to take leadership on that?

There's a middle state of grief called bargaining, typically unsuccessful; here, there might need to be some compensation for the vote some must make. That compensation ought to be in the form of Democratic acceptance of some Republican demands for reform, rather than buckets of pork doled out to individual holdouts.

What each participant demands and offers on the way to the inevitable ought to be scrutinized, as it will be a critical test of whether legislators are working for the common good, or just being extraordinarily selfish.

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Brian P. / June 18, 2009 4:50 PM

I disagree, Mr. Smith, from point 1 on. If we are going to talk economics, then we cannot possibly have a structural deficit because a structural deficit assumes that an economy is at full capacity yet still unable to pay its bills. Hopefully, with our state facing 10% unemployment, our economy is not operating at full potential. When economic times are better (as has been the case in the past), Illinois has been able to pay its bills.

During this downturn, the individuals of Illinois don't have the option of going up to their employer and asking for a raise. So why do we think that when times get tough the government can come to us, the taxpayer, and ask for more money when its already tough enough out there? Government, like the rest of America, needs to adjust its budget to accommodate for these hard times.

Jeff Smith / June 18, 2009 5:11 PM

Brian, I agree very much with your last sentence. Average Americans, when revenues drop, tighten their belts (or take on a part-time job).

But Illinois was already in a fiscal mess 8 years ago, after the popping of the last big bubble, when Blagojevich took office. Since then the budget has been balanced primarily by underfunding the pensions, by neglecting infrastructure, and by creative accounting. I don't think that's a good way to "pay bills." I urge you to click the links and read the Civic Federation report. My point is that even a conservative POV finds that some tax increase is necessary.
We need to get away from this idea that "the government" is somebody else "coming to us" for money. If the system works right, it's "us" who is "coming to us."

Andrea Raila / June 19, 2009 12:10 PM

"When economic times are better (as has been the case in the past), Illinois has been able to pay its bills"......I disagree, even when real estate values were exploding and Illinois was raking in property tax dollars--- which account for an annual $24 billion verses sales and income taxes at $22.3 billion---I have to agree with Jeff.... Illinois was in a fiscal mess 8 years ago and then some! Even in the good times Illinois government was using reckless "creative" accounting.

California and Illinois tops all states with the highest budget deficits.

Yet CA has 36.7 million residents and a $16 billion deficit. IL has 12.9 million residents and a $11 billion deficit.

Do the math...every man woman and child in CA would have to pay $435 to cover their budgetary black hole...while in Illinois we'd have to pay $852....someone was spending money like a drunk sailor...part of the problem was the pay to play and no regulations on state bought contracts with the private sector.... Thank God we have a fiscal conservative and reform minded Governor with courage to say yes to a tax increase (better if it were graduated but exemptions could help with that).

Suzanne / June 21, 2009 3:52 PM

Brian, you can’t possibly be arguing that Illinois’ deficit is cyclical. Illinois has been incapable of generating sufficient revenue even in periods of peak capacity since Lincoln. Ok, not really that long but long enough. FYI, peak capacity is not a static requirement for characterizing what is or is not a structural deficit any more than personal debt is defined solely by bankruptcy.

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