Illinois’ deficit reduction scheme

by Linda Beale

Illinois’ deficit reduction scheme
crossposted with Ataxingmatter

States have generally suffered during this economic crisis much the way most people have–there’s been less money coming in as sales receipts slowed during the recession, more services needed as many become homeless, insuranceless and generally more vulnerable during the recession, and bills have continued to pile up (including for mundane things like utilities and print jobs and more long-term commitments like pension promises made to state employees to secure competent workers often at lower-than-market wages for those competencies).

States have a number of options for dealing with the demands.  They can layoff employees and freeze salary increases, taking the brunt of the recession out of the hide of state services and state employees and at the same time likely making the recession worse as the state is unable to provide the kinds of assistance to its most vulnerable populations that it otherwise would have been able to do.  They can utilize accounting gimmicks to delay a few bills and accelerate a few revenue items, making this year look better at the cost of next year.  They can use reserve funds that they’ve set aside for a rainy day, though when such funds are used for basic operating expenses, it guarantees that a truly rainy day will come and there will be no funds to meet the unexpected needs.  Or they can raise taxes–either sales taxes, which will fall primarily on the most vulnerable, since consumption taxes are a kind of flat, across-the-board tax that is regressive since the poor spend all of their income (and pay taxes on all of it) while the rich spend a small share of their income (and hence pay minimal taxes in proportion to their ability to pay).

Some states have dealt with the problem with the perennial accounting gimmickry.  All  that does is paper over the problem and pass it along to the next budget year.  That’s what Schwartzeneggar did in part in California, meaning that Jerry Brown has a huge budget gap to face that will require a mix of cuts and tax increases.  Treating accounting gimmicks as a real solution is sort of like George W. Bush saying that the $1.3 Trillion of tax revenue losses created by his 2001 tax cut bill  wouldn’t really ever materialize, because of the “laffer effect” that tax cuts would be so conducive to economic growth that the government would actually get as much revenue as before or even more! Laugable, of course, since any serious economist will tell you that tax cuts do not pay for themselves.  Even more laughable now after the experience of the 8 years of the Bush regime when a new tax cut bill passed every year and we had at best an anemic job creation record  and no sharing of productivity gains with workers.  Tax cuts that just leave more money in the pockets of overly compensated managers and already wealthy shareholders do just about nothing towards creating jobs.  Mainly that give more money to people that already have a lot of it, and those people are more likely to put it in emerging economies or some other kind of vehicle that does nothing to support entrepreneurship or create jobs here in the USA.

Some states seem to be dealing with the fiscal crises by cutting workers pay and cutting workers.  That is likely merely to make the crisis worse over the long run.  It increases unemployment–thrusting a number of former public employees on the dole.  It leaves businesses facing less purchasing power–especially in and around the state capitol.  It creates an atmosphere of austerity which breeds its own consumer pessimism that feeds negatively into the recession cycle.  It leaves state services shorthanded, with a likely result that accidents and crimes will increase (as state parks and large public events are understaffed), and other indicators of a good quality of life will go down (long lines at the department that issues drivers’ licenses, etc.).

So that leaves thinking about tax increases.  Even those who think state taxes should increase–especially in ways that make them more progressive (think Michigan–where a very low income tax rate that is constitutionally capped means that the wealthy benefit hugely from the state’s expenditures but pay very little in taxes)–may hesitate to recommend large tax hikes during recessions, in part because of the psychological impact of a tax hike, on top of all the other “bad” economic news.  If people have a choice, they might just move to a state that doesn’t have such a tax hike.  And since tax increases are most likely to impact people with higher incomes who have a choice, it is possible (though certainly not inevitable) that a tax increase on higher incomes will lead to some exodus from the state of those high income earners who are mobile.  But there are reasons that a tax increase might make the most sense out of the various unpleasant options.  The fears about exodus are probably exaggerated–people have any number of reasons for choosing where to live, and a business that has established ties (customers, vendors, workers) cannot so easily just move lock stock and barrel to another state.  Tax money in state coffers will be spent as it comes in–it really isn’t taking that money out of the economy, but just reallocating it to preferential uses.  To the extent that the money is used to support vulnerable populations who would otherwise create a burden on local and state government anyway, it is clearly a win-win proposition.  And of course if the state funds are used in ways that encourage business startups or new types of businesses to move to the state (and use supplies, hire workers, etc.), the state expenditures will give greater bang for the buck than leaving them in the hands of weathier state residents who would have invested them abroad.  When tax increases permit a state to satisfy the various obligations it has entered into, that fosters a climate of business certainty and trust–state employees know that the contract they have entered will be honored, businesses in the state agree to contract with the state because they will be paid, and the state and its municipalities can successfully borrow in the muni market to meet those capital expansion needs that require longer term financing.

All in all, it seems that reasonable tax increases should be a win-win proposition, even during difficult economic times.  What is reasonable?  A tax increase that will be paid by people and businesses that can afford it and that will be used to support worthy state endeavors.

At any rate, that is the decision that Illinois Democrats reached today, as an income tax increase “squeaked through” the Illinois House (60-57 vote Tuesday) and Senate (30-29 vote Wednesday) before the new legislative session began this afternoon.  See Karen Pierog, Illinois Lawmakers Pass Big Tax Hike to Aid Budget, Reuters, Jan 12, 2011.  The bill temporarily increases the individual and corporate income tax rates, and sets a spending limit through fiscal 2015.    For a description of the proposal put together by the Governor and Speaker and Senate President, whichapparently had stiffer rate increases and other provisions than the bill actually passed last night (which is not yet available on the Illinois website), see here (Phil Milsk legislative update on January 7 for Illinois Association of School Social Workers).