Illinois Fiscal Rehab

Our friends over at the Civic Federation on Monday issued a “Fiscal Rehabilitation Plan for the State of Illinois.”  It has a pretty decent summary of where we stand financially, and by what route we got here.  The short version of this is, we are in deep doo doo.  And in recent years, the doo doo has been spread around in confusing ways, making it harder to trace the problem.  But now, no question about it, we have retiree benefit liabilities far beyond the funds available to pay them, debt has been increasing, and programs for the poor are facing increasing burdens with decreasing resources, while tax revenues have been slipping. (The report doesn’t discuss infrastructure needs.)

The report, funded by some of Chicago’s wealthiest foundations, recommends freezing or cutting funds for  State programs, reducing pension obligations to the extent possible, raising the personal income tax 67% and corporate tax 33%, and removing a few relatively minor tax breaks.  It also suggests that pension income be taxed and that the State move toward taxing consumer services.  Despite these tax increases and ongoing national economic difficulty, it pretends that the income and sales tax bases will not decrease.

Of course this is a dumb plan.  Frozen or reduced expenditures will be inadequate to meet the State’s needs. Increased rates of tax on productive activity will cause some of that activity to leave Illinois, or simply not to occur.   When they see their income become subject to tax, some pensioners will choose to move out of state– and the ones best able to leave are the affluent ones, who pay sales and property tax and don’t so much burden public services.

But the State is in a fiscal hole, so if I don’t like the Civic Federation’s plan shouldn’t I suggest one of my own?  Despite the lack of foundation funding, that is what I shall do.

I won’t comment much on the expenditure side. Probably some pension cutbacks are appropriate, and there is surely plenty of fraud and waste in many programs (tho catching it is difficult).   Some programs certainly could be eliminated, but the big ones– education, transportation, aid to those unable to work– are necessary in some form.  Also, there is an existing debt of about  $25 billion, plus $66 billion in unfunded retiree liabilities (for past years). So we need a lot of revenue.  How to get it?

What about a land value tax? Now, nobody knows what the land of our State is worth, but we know for sure that it isn’t moving away.  It might be $2 trillion.  Suppose we were to tax that at, say 1% of value.  That’s $20 billion/year, more than the total raised by the State sales, corporate and personal income taxes. That bails us out of the debt in a few years, allowing eventual elimination of these other taxes.

Is it fair? It’s more fair than asking hardworking people to share their salaries with the State, then pay again when they purchase things.  (The Illinois sales tax originated, in 1933, as a way to eliminate the real estate tax.) It’s not just fairer, but also smarter, than telling employers and retirees that if they stay in Illinois, the State will take a share, an increasing share, of their income..

I have a special affinity for taxing farmland, because I look at listings like this 210-acre farm where real estate tax is only 1/10th of 1% of value.  Others pay even less.  It’s quite legal, tax preferences for “farmland” even tho the owners in most cases are investors, not farmers.  There are plenty of urban examples, too, some illustrated here.

Although Civic Federation’s recommendations are foolish, I think descriptive portions of the report are pretty good.  Two things I learned are, first, that the number of State employees has dropped about 20% in the past decade, and second, that expenditures on “Corrections” are only about $1.1 billion/year. It still would be a good idea to let all the innocent people out of prison, but that’s not going to solve our budget problem. However, if we raise taxes as the Civic Federation suggests, those released, as well as the rest of us, are unlikely to be able to find jobs.