CENTER FOR TAX AND BUDGET ACCOUNTABILITY
70 E. Lake Street  Suite 1700  Chicago, Illinois 60601  direct: 312.332.1049  Email: rmartire@ctbaonline.org
The Case for Fundamental Tax
Reform in Illinois: Why We Need a
Graduated State Income Tax
For:
Wednesday, May 23, 2012; 7:00 pm
Champaign, IL 61820
Presented by:
Ralph Martire, Executive Director
1
© 2012, Center for Tax and Budget Accountability
FY2013 Accumulated Deficit
($ billions)
Category
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
Projected FY2013 Revenue
FY2013 Hard Costs
Deficit Carry Forward from FY 2012
Net FY2013 General Fund Revenue Available for
Services
General Fund Service Appropriations in Proposal (Net
of “Unspent Appropriations”)
Minimum FY2013 General Fund Deficit
Potential Adjustments to Minimum Deficit
Potential Increase to Deficit from Group Health
Potential Increase to Deficit from Medicaid
Use of House Rather than GOMB Revenue Estimate
Increased FY2013 Deficit
Deficit as a percentage of General Fund Services
Approps
GOMB
$33.940
(-$9.450)
(-$8.500)
House
$33.719
(-$9.460)
(-$8.500)
$15.990
$15.759
$24.325
(-$8.335)
$23.458
(-$7.699)
(-$.260)
(-$1.350)
(-$.210)
(-$.260)
(-$1.350)
$0
(-$10.155)
(-$9.309)
(-41.7%)
(-39.7%)
Sources: FY2013 GOMB Budget Book, Ch. 2-63, HR706 Enrolled, adopted March 29, 2012;
Amendment No. 1 to HR707 adopted March 1, 2012 and Senate Floor Amendment No. 1
to SR586 adopted March 7, 2012.
2
© 2012, Center for Tax and Budget Accountability
HISTORICALLY:
That huge shortfall entering
FY2013 is a real problem
because……Over $9 out of $10 of
G.F. are spent on:
• Education
(PreK-12 plus Higher Ed) 35%
• Healthcare
30%
• Human Services
21%
• Public Safety
5%
91%
3
© 2012, Center for Tax and Budget Accountability
Quinn’s FY2013
“Rendezvous with Reality”
Focuses on spending cuts
to resolve the budget
deficit
4
© 2012, Center for Tax and Budget Accountability
Rendezvous with
Reality—Take 2:
1. Spending on services is not
a MAJOR cause of the
deficit problems to begin
with; and
2. Cutting spending in the
core service areas at this
juncture is not just
difficult to do- - - but
really poor public policy.
5
© 2012, Center for Tax and Budget Accountability
FY2000 – FY2013
G.F. Spending
20.0%
16.3%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-19.2%
-25.0%
-24.5%
-30.0%
State Spending Increase
(Nominal Dollars)
State Spending after
State Spending Increase
After Adjusting for the Adjusting for the ECI and
Population Growth
Midwest CPI and
Population Growth
6
© 2012, Center for Tax and Budget Accountability
Illinois General Fund Spending by Major Public
Service Category FY2013 Governor’s Proposal
Compared to FY2000 Enacted, And FY2000
Adjusted for Inflation and Population Growth
($ Millions)
Category
FY2000
Enacted
FY2013 Nominal
FY2000,
$ Diff
Proposed
%
Enacted Adj FY2013 –
GOMB
Change for Infl (ECI) FY2000 Adj
and Pop
(ECI and
Pop
Growth
Growth)
%
Change
Pre K-12
Higher Ed
Health Care
(excluding Group
Health)
$4,844
$2,152
$5,022
$6,783
$2,161
$6,893
40.03%
0.43%
37.25%
$7,464
$3,315
$8,934
(-$681)
(-$1,154)
(-$2,041)
-9.1%
-34.8%
-22.8%
Human Services
(excluding all
Health Care)
$4,599
$5,060
10%
$7,086
(-$2,026)
-28.6%
Public Safety
$1,350
$1,510
11.9%
$2,081
(-$571)
-27.4%
Sources: Unadjusted appropriations from Governor’s final budget summary for FY2000 and from GOMB budget proposal for
FY2013. Inflation for all categories except Health Care computed at cumulative change in ECI from 2000-2012.
Inflation for Health Care calculated using the cumulative change in the
Midwest Medical Care CPI (Midwest Medical CPI) from 2000 through 2011.
7
© 2012, Center for Tax and Budget Accountability
So the Legislature Cut Taxes
for Business And the Affluent
Under P.A. 097-0636
($ Millions)
Category
FY2013
FY2014
Reduction in Corporate Income Taxes Payable by CME
(-$ 43)
(-$ 85)
Exchange Market Data Tax Expenditure for CME
(-$ 8)
(-$ 8)
Sears
(-$ 15)
(-$ 15)
R&D Credit
(-$ 40)
(-$ 40)
Net Operating Loss Reinstatement
(-$ 50)
(-$ 50)
Live Theatre Credit
(-$ 1)
(-$ 1)
Total Corporate Tax Expenditures
(-$157)
(-$199)
Estate Tax Cut
(-$ 20)
(-$ 43)
TOTAL REVENUE LOSS
(-$177)
(-$242)
Source: Fiscal Note to P.A. 097-0636.
Jobs Created?? — ZERO
8
© 2012, Center for Tax and Budget Accountability
What Cost
Business Subsidies?
The annual cost in lost revenue to the state’s General Fund from
the tax expenditures of $93 million (for a full fiscal year) granted
under PA. 097-0636 to the Chicago Mercantile Exchange, a
company that reported over $950 million in annual profits in
2010, is more than what the state will save in General Fund
revenue costs from:
(i) closing eight Department of corrections facilities and two
Department of Juvenile Justice facilities; and
(ii) making staff reductions at and consolidations of offices within
the Department of Children and Family Services, Department of
Agriculture, Central Management Services, and the Illinois State
Police, combined.
Estimated Direct Job Loss: $1,923
Total Job Loss:
$2,661
9
© 2012, Center for Tax and Budget Accountability
OH — & THEN THERE’S
Hurting the Private Sector
Economy with Cuts
Estimated job loss if IL eliminates its deficit by cutting spending
-20,000
-40,000
Jobs Lost
JOB LOSS
0
-60,000
-56,893
-71,116
-80,000
-100,000
Estimated job loss
by cutting
spending
-99,562
-120,000
-128,008
-140,000
$4,000,000
$5,000,000
$7,000,000
$9,000,000
Size of IL spending cut
10
© 2012, Center for Tax and Budget Accountability
Which Makes No Sense Because:
 Illinois had the second lowest real GDP Growth in the entire
Midwest in 2010
Real GDP Growth 2010
Indiana
4.6%
Iowa
3.1%
Michigan
2.9%
Wisconsin
2.5%
Ohio
2.1%
Illinois
1.9%
Missouri
1.4%
 National and Midwest Average was 2.6%
11
© 2012, Center for Tax and Budget Accountability
Soooooo…….despite
being BIG ‘N RICH
ILLINOIS’ ECONOMY
IS LARGE
• In 2008, Illinois ranked
fifth nationally with a
Gross State Product in
excess of $633 billion
(BEA).
• That would be the 27th
largest economy of any
nation in the
world-greater than Egypt,
Saudi Arabia, Colombia,
Belgium, Sweden, Greece,
Ireland, Portugal, Norway
and Nigeria, to name a few.
12
© 2012, Center for Tax and Budget Accountability
THE ILLINOIS ECONOMY
Illinois GDP
Growth Lagged
GDP Growth 1990-2007
80.0%
70.0%
71.7%
60.0%
50.0%
49.4%
48.1%
40.0%
30.0%
20.0%
10.0%
0.0%
US
Midwest States
Illinois
Source: Bureau of Economic Analysis, US Dept. of Commerce
13
© 2012, Center for Tax and Budget Accountability
Drill Down on
Spending
By Major Category:
Human Services
Healthcare
Education
14
© 2012, Center for Tax and Budget Accountability
HUMAN SERVICES
Illinois State General Fund Appropriation Cuts
to Human Services Funding, Adjusted for
Inflation and Population Change
FY2002-FY2012
Category
Total Across Agencies
(nominal $)
FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
4,971
4,666
4,785
4,942
5,047
5,197
5,492
5,655
5,446
5,128
4,754
Real Value of 2002 Approp
(ECI + Pop)
4,971
5,160
5,351
5,561
5,762
5,944
6,162
6,381
6,553
6,679
6,835
% Shortfall
0.0%
-9.6% -10.6% -11.1% -12.4% -12.6% -10.9% -11.4% -16.9% -23.2% -30.4%
$ Shortfall
0
(494)
(565)
(619)
(715)
(748)
(670)
(726)
(1,107) (1,552) (2,080)
*Data from CGFA Budget Summary FY02-12
*Inflation adjustments made using ECI and population
change
*All data in millions
• Looking back over the past decade, we see a cumulative cut of over $2 billion
dollars, when inflation and population change are taken into account.
15
© 2012, Center for Tax and Budget Accountability
As for Cutting
Healthcare, well…..
EMPLOYER-PROVIDED
BENEFITS

Employer-provided
health insurance
benefits have been
steadily declining in
Illinois since 1980.
 By 2008, over 43% of
the workforce didn’t
have employer-provided
insurance.
 Hispanics especially
hard hit–over 57% do
not have
employer-provided
insurance.
 By 2010, 32% of the
Illinois population is
either on Medicaid or
uninsured.
16
© 2012, Center for Tax and Budget Accountability
Medicaid Total
Program Liability
FY2012
FY2013 (est)
FY2014 (est)
$10.870 b
$11.460 b
$12.029 b
*FY2012 GRF $4.012 B
Other Med Fund $6.858 B
**FY2012 Medicaid carry forward to FY2013 est. $2.4 B
Governor proposes $2.7 B in 2013
17
© 2012, Center for Tax and Budget Accountability
Medicaid spending by Funding Source
(Federal, State and Local)
$18
$16.2B
$16
$14
$14.3B
$13.9B
$14.3B
$12.5B
(billions)
$12
$10
$6.6
$7.6
$2.9
$2.4
$6.0
$9.6
$8.4
$8
$6
$4
$2.3
$4.2
$4.4
FY 2007
FY2008
$2.6
$3.3
$3.3
$3.3
FY 2010
FY 2011
$4.3
$2
$0
State General Funds
FY 2009
Other State and Local Funds
Federal Funds
18
© 2012, Center for Tax and Budget Accountability
FLAT FUND EDUCATION?
$ Difference in Per Pupil
Foundation Level Funding
EFAB vs. ACTUAL
FY Difference
$0
-$120
-$500
-$1,000
-$1,500
-$2,000
-$2,241
-$2,500
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
The Illinois State Board of Education estimates it would cost $3.1 billion to increase the current Foundation Level to the
EFAB recommendation.
19
© 2012, Center for Tax and Budget Accountability
EXHIBIT “A” IS EDUCATION
Really?
As it is — Illinois ranks 49th out of
50 states in portion of education
funding covered by the state
But Education
now matters more
than ever to
economic prosperity:
Generally: unemployment rates
are highest for those with the
least education.
20
© 2012, Center for Tax and Budget Accountability
WAGE DIFFERENCES
Really?
Impact of Education
on Wages
In real (2006) dollars, between 1980 and
2006, only those with at least a college
degree experienced any gain in hourly
income, with growth of 14.3%
Real median hourly wages for all
other education categories declined
Less than a high school diploma fell
by (-28.7%)
Only a high school education declined
(-8.7%)
Some college but no degree declined
(-4.3%)
You gotta learn to earn!
21
© 2012, Center for Tax and Budget Accountability
WAGE DIFFERENCES
Wages for Minorities
lag Whites
Real wages for Whites increased modestly
between 1980 and 2007, but :
The White-Hispanic wage gap is larger in amount,
but increased by a smaller percentage, growing
from $3.82 in 1980 to $5.34 in 2007, an increase of
39.7% over 1980
Real wages for African-Americans declined. The
hourly wage gap between Whites and AfricanAmericans grew from $1.52 in 1980 to $3.44 in
2007, an increase of 126.3% over 1980
22
© 2012, Center for Tax and Budget Accountability
PROPERTY
TAX RELIANCE
THE STARTING
POINT
Primary
Causal Factors
•Flawed Tax Policy
•Irresponsible Fiscal
practices
•The “Great Recession”
of 2008-2009
23
© 2012, Center for Tax and Budget Accountability
ELEMENTS OF A SOUND AND
FAIR FISCAL SYSTEM
Capitalist Tax Policy
Should Be:
FAIR

PROGRESSIVE
RESPONSIVE

TO MODERN ECONOMY
STABLE

DURING POOR
ECONOMIES
EFFICIENT

DOESN’T DISTORT
PRIVATE MARKETS
ILLINOIS IS 0 for 4
24
© 2012, Center for Tax and Budget Accountability
Which Creates a
Structural Deficit
25
© 2012, Center for Tax and Budget Accountability
Summary of State-Sponsored
Retirement Systems’ Financial
Conditions ($ Thousands)
System
JRS
Assets
Liabilities
Unfunded Liability
Funded Ratio
Unfunded Liability to
Payroll Ratio
614,596.2
1,952,539.4
1,337,943.2
31.5%
791.0%
SERS
11,159,836.6
31,395,007.8
20,235,171.2
35.6%
480.5%
TRS
37,769,753.0
81,299,745.0
43,529,992.0
46.5%
472.9%
SURS
13,945,700.0
31,514,300.0
17,568,600.0
44.3%
507.6%
GARS
63,161.0
298,408.4
235,247.3
21.2%
1548.9%
Source: Each systems FY2011 CAFR
Note: Assets are calculated using the actuarial value of assets method, which smoothes losses/gains over five years.
26
© 2012, Center for Tax and Budget Accountability
Causes of Growth in State
Systems’ Unfunded Liabilities
1996-2010
$30
24.7
$25
In Billions
$20
$15
11.7
10.6
$10
5.8
3.5
$5
0.7
$0
Salary Increases
Investment
Returns
Employer
Contributions
Benefit Increases
Changes in
Assumptions
Other Factors
Source: The Commission on Government Forecasting and Accountability. 2011. A Report on the
Appropriateness of the 90% Funding Target of Public Act 88-593. p. 9
27
© 2012, Center for Tax and Budget Accountability
The "Ramp" before the 2008 Economic meltdown!
Required Yearly Pension Payments:
FY 2006 - FY 2045
$18,000
$16,000
$14,000
$12,000
$ in Millions
POOR FISCAL PRACTICES
……And of course, this:
$10,000
$8,000
$6,000
$4,000
$2,000
$0
28
© 2012, Center for Tax and Budget Accountability
FY2012 and FY2013 GOMB
Projected Pension
Contributions ($ Millions)
Fiscal Year 2012
Adopted Budget
Fiscal Year 2013
Proposed Budget
$2,406
Teachers Retirement System
State University Retirement System
$980
State Employees, Judges & General Assembly
Retirement Systems
$978
Less: Transfers from State Pension Fund
(Unclaimed Property)
Equals: General Fund Pension
Contributions (net)
$2,703
$1,403
$1,144
(-$230)
(-$160)
$4,135
$5,090
Source: FY2013 GOMB Budget Book, Ch. 2-18.
29
© 2012, Center for Tax and Budget Accountability
OPTIONS
Future Options :
• Borrowing from financial
institutions to pay overdue bills
and cover operating costs
• Continued deferment of payments
owed providers
• Further cutting appropriations
for services
• Raising Revenue:
– Expanding sales tax to services.
– taxing some retirement income
– a graduated rate income tax.
30
© 2012, Center for Tax and Budget Accountability
Revenues of Goods and Services as a Percent of Gross
Domestic Product: Illinois (SIC:1965-1996, NAICS: 2008)
SALES TAX BASE
70%
60%
59%
60%
53%
50%
Services as a
percent of GDP
41%
40%
36%
Goods as a
percent of GDP
32%
30%
26%
20%
20%
18%
12%
10%
0%
1965
1975
1985
Year
1996
2008
31
© 2012, Center for Tax and Budget Accountability
• Adam Smith, the father of modern
capitalism, contended that for a tax
system to be fair it has to be
progressive.
• According to Smith:
"The subjects of every state ought to
contribute toward the support of the
government, as nearly as possible, in
proportion to their respective abilities; that
is, in proportion to the revenue which they
respectively enjoy under the protection of the
state ….[As Henry Home (Lorde Kames) has
written, a goal of taxation should be to]
'remedy inequality of riches as much as
possible, by relieving the poor and burdening
the rich.'"
32
© 2012, Center for Tax and Budget Accountability
• Was Adam Smith right? The longterm trends in income distribution
in America demonstrate that his
reasoning was solidly on target.
Distribution of US Income Growth Over Time
Families
Top 10%
Bottom 90%
1947 - 1979
1979 - 2007
Percentage Income Growth
Received
34.10%
63.70%
65.90%
36.30%
Source: Piketty and Saez, "Striking it Richer: The Evolution of
Top Incomes in the United States (Update with 2007 estimates),"
August 5, 2009, U. C. Berkeley; Calculations from John Schmidt,
Challenge, September - October 2010.
33
© 2012, Center for Tax and Budget Accountability
Illinois State & Local Taxes Paid as a Share
of Family Income for Non-Elderly Taxpayers
Income Group
Income
Average Income in Group
Sales & Excise Taxes
Property Taxes
Income Taxes
TOTAL TAXES
Federal Deduction Offset
TOTAL AFTER OFFSET
Lowest
20%
Less than
$18,000
$10,100
6.9%
4.8%
2.0%
13.7%
–0.0%
13.7%
Second
20%
$18,000 –
$36,000
$26,600
5.5%
3.6%
3.2%
12.3%
–0.1%
12.2%
Middle
20%
$36,000 –
$58,000
$47,000
4.4%
3.7%
3.9%
12.0%
–0.4%
11.6%
Fourth
20%
$58,000 –
$95,000
$74,700
3.6%
3.7%
4.0%
11.4%
–0.7%
10.7%
Next
15%
$95,000 –
$196,000
$128,900
2.7%
3.9%
4.1%
10.7%
–1.1%
9.5%
Top 20%
Next
4%
$196,000–
$500,000
$300,700
1.7%
3.1%
4.1%
8.9%
–0.8%
8.0%
Top
1%
$500,000
or more
$2,084,700
0.8%
1.5%
4.2%
6.5%
–1.2%
5.3%
Source: Institute on Taxation & Economic Policy, Who Pays? A Distributional Analysis of Tax Systems in All 50 States, p. 42, Third Edition,
November 2009. Note: This table shows 2007 data updated to reflect permanent changes in Illinois tax law enacted through January, 2012.
34
© 2012, Center for Tax and Budget Accountability
E
f
f
e
c
t
i
v
e
T
a
x
C
u
t
Less than Zero
$0 > $1,000
$1,000 > $3,000
$3,000 > $5,000
$5,000 > $7,000
$7,000 > $9,000
$9,000 > $11,000
$11,000 > $13,000
$13,000 > $15,000
$15,000 > $17,000
$17,000 > $19,000
$19,000 > $22,000
$22,000 > $25,000
$25,000 > $30,000
$30,000 > $35,000
$35,000 > $40,000
$40,000 > $50,000
$50,000 > $75,000
$75,000 > $100,000
$100,000 > $150,000
$150,000 > $200,000
$200,000 > $300,000
$300,000 > $500,000
$500,000 > $1,000,000
$1,000,000 OR MORE
Potential Effective Tax Rate Changes in
Illinois with Graduated
Individual Income Tax Structure
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
Base Income
35
© 2012, Center for Tax and Budget Accountability
FAIRER TAXATION
R
a
t
e
Average
E
f
f
e
c
t
i
v
e
Less than Zero
$0 > $1,000
$1,000 > $3,000
$3,000 > $5,000
$5,000 > $7,000
$7,000 > $9,000
$9,000 > $11,000
$11,000 > $13,000
$13,000 > $15,000
$15,000 > $17,000
$17,000 > $19,000
$19,000 > $22,000
$22,000 > $25,000
$25,000 > $30,000
$30,000 > $35,000
$35,000 > $40,000
$40,000 > $50,000
$50,000 > $75,000
$75,000 > $100,000
$100,000 > $150,000
$150,000 > $200,000
$200,000 > $300,000
$300,000 > $500,000
$500,000 > $1,000,000
$1,000,000 OR MORE
Effective Tax Rates by Base Income
with Graduated Income Tax
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Base Income
36
© 2012, Center for Tax and Budget Accountability
AND IT WON’T HURT THE
ECONOMY AT ALL
From 2000 - 2012
• 9 states with highest graduated
income tax rate structures had:
– Better growth in state GDP per capita
– Better change in median wage
– Identical unemployment rate
Than the 9 states with NO income tax
Source: Institute on Tax and Economic Policy
38
© 2012, Center for Tax and Budget Accountability
FURTHER INFORMATION
For More Information:
Center for Tax and Budget Accountability
www.ctbaonline.org
Ralph M. Martire
Executive Director
(312) 332-1049
rmartire@ctbaonline.org
Jennifer Lozano
Research Associate
(312) 332-1348
jlozano@ctbaonline.org
Ron Baiman, Ph.D.
Director of Budget and Policy Analysis
(312) 332-1480
rbaiman@ctbaonline.org
39
© 2012, Center for Tax and Budget Accountability