It’s no secret that Illinois is in financial trouble. The State faces a $6 billion budget deficit for the upcoming fiscal year. The $100 billion unfunded pension liability is the largest in the nation and the IL Supreme Court just threw out the 2013 pension reform law, making the debt problem worse than it already was. On top of that very large obligation, Illinois also has a backlog of bills totaling almost $7 billion.
Unsurprisingly, Democrats and Liberal groups are using this as an opportunity to call for new and higher taxes. House Speaker Madigan and Senate President Cullerton have sent a $36 billion spending plan to Governor Rauner with a $4 billion hole in it. They want to fill that hole with “new revenue.”
Proposals for tax increases in Illinois range from the serious to the silly, including adding new taxes on everything from guns and gun parts, sugary drinks, fireworks, and satellite TV. There’s also a number of more standard proposals, summarized in a recent Crain’s opinion piece by how much they would raise.
Liberals are using the state’s budget crisis to pull heart strings and make it sound as if new and higher taxes are the only way out. Democrats have been sounding off against Rauner’s $31.5 billion spending plan, which called for no new revenue, by holding up orphans, the disabled, and the working poor, all of whom they say need more government aid. Rauner on the other hand contends that his budget would maintain essential services and that many of the social service cuts he has proposed would eliminate duplicate programs while allowing affected citizens to seek aid from another of Illinois’ multitude of social services programs. More to the point, there simply isn’t enough money to pay for all these programs, even good ones, because Democrats have destroyed the fiscal health of the state over the last three decades.
The message from Democrats is clear: “Cuts have consequences.” Well, guess what? Taxes hurt people too.
The Quinn-Madigan tax hike that Rauner campaigned against took about 2 weeks pay from an average worker. Illinois is already the WORST state in the nation in terms of overall tax burden and the second worst in terms of property taxes. The average Illinoisan pays about $7,719 in state and local taxes alone on top of what goes to the federal government. High taxes place a strain on the economy. With less money in their pockets, average citizens have less to spend. With more of their profits taken by the government, businesses have less money to hire new workers or invest in innovation.
This punishing tax environment and the lagging economy it brings with it is a major reason that people are leaving the state in droves for lower tax states like Texas, Florida, and Indiana. Illinois had the second-highest outmigration in the country last year. And when people leave, they take their tax dollars with them to other states. Over the last two decades, Illinois has lost almost $40 billion in tax revenue due to outmigration. Just by stopping the flow of taxpayers out of the state, Illinois could go a long way towards solving its budget crisis.
Now, there are some tax proposals that policymakers can consider as part of the solution. A joint report from the left-leaning Center for Tax and Budget accountability and the center-right Taxpayers’ Federation has argued in favor of expanding the Illinois sales tax to include consumer services, a move that would raise roughly $2.2 billion in new revenue.
Generally, consumption taxes like the sales tax make for better policy than taxing income. Relying on sales taxes can encourage consumer savings during a recession and stabilize government revenues. Expanding the IL sales tax to include services would also fit with the generally agreed upon principle of “broadening the base.” Currently, Illinois has a very narrow sales tax base which means that even though rates are higher than average, collections are actually much lower than average.
Still, that $2.2 billion will not solve the entire $6 billion budget deficit. Policy makers must not try to balance the books on the backs of taxpayers, further damaging an already limping economy. Structural reform and spending reductions must be the primary goals for sound budgeting in the future.