Tax Reform! Not Pension Reform, Budget Cuts and Tax Breaks for the Wealthy
Although SB 512, which would have put Illinois teacher pensions (at least the defined benefit plans) on the road to doom, has been stopped for now, it will take one last breath on November 29, 2011, when the Illinois General Assembly comes back into session briefly, and then not reappear, in the opinion of most observers until the next session of the General Assembly. But the brief respite from the demand for "pension reform" is only a time for those who take real teacher pensions seriously to regroup and discuss some coherent responses.
A recent article in the State Journal Register (November 17, 2011) states that the five pension systems need $5.33 billion for fiscal year 2013, approximately one billion dollars more than was originally anticipated, though Governor Quinn also says that state revenue is expected to grow by $1.3 billion next year. This amount has increased 20% overall because of increases of approximately $700 to $800 million for Medicaid; changes in assumptions by actuaries from the State University Retirement System; the passing of SB 1946 (Public Act 96-0889) in April of 2010 that caps new public employees’ salaries and lowers their benefits (and thus less money is made available for contributions to the pension systems); and larger payments needed today as a result of the 1995 “ramp-up” funding law (Public Act 88-593) to pay the pension systems what the state owes because of its delinquent payments to those systems for decades and to reach a 90-percent funding ratio by 2045 (Wetterich), although only 15 states in the nation have a funded ratio slightly over 70 percent while the average funding ratio is 63 percent (Barclays Capital, May 2011). According to the National Conference on Public Employee Retirement Systems (May 2011), “a funded ratio of 70 percent or above is [considered more than] adequate.”
It is true that the only proposal currently before the state legislature, the flawed SB 512, will not address the current unfunded liability and that what the state should focus upon is structural reforms for revenue but hasn’t the political will to do it. Solving the shortfall between available assets and accrued liabilities is not the issue. It’s a symptom of a greater cause. Pension systems carry liabilities into perpetuity because they are “perpetual government agencies” (The Teachers’ Retirement System of Illinois). There is never a need to match assets and liabilities ever.
It is unfortunately true that most state legislators lack the political backbone to address the causes of the budget problems but prefer scapegoating the public employees and their pension systems instead while being abetted by the Civic Committee of the Commercial Club of Chicago, the Civic Federation and the Chicago Tribune. Legislators do not want to pay what is owed to the public pension systems even though past legislators, especially past governors, were the cause of the pension systems’ lack of funding. What is needed to solve the budget problems in Illinois is a better revenue base to pay the state’s debts. What is easier to do is to evade serious problem solving of the budget issue and to incriminate the state’s public employees. The issue at hand is the state’s regressive tax rate that no one wants to confront. Unfortunately, the public lacks awareness and understanding about this gross injustice and main cause of the state’s budget deficits. Legislators, the Civic Committee, et al. have capitalized on this circumstance by calling for budget cuts and radical pension reform as the solutions for the budget problems in Illinois. They are diversionary, scapegoating tactics that will bring, what seems to be an intentional, financial harm to public employees while policymakers escape public indignation and ethical responsibility.
“At the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy). Instead of reforming our tax system, legislators and the wealthy one percent of Illinois have focused on radical pension reform and severe budget cuts to services that the rest of us need. What do the wealthy and their puppet legislators propose? They propose sweeping pension reform and desire the resultant destruction, whether deliberate or inadvertent, of the public employees’ retirement systems even though the current unfunded liabilities will not be mitigated by Senate Bill 512. In addition, they propose budget cuts that will undermine healthcare for children, the elderly and low-income families; budget cuts that will prolong and increase the state’s unemployment; budget cuts in public safety and transportation; budget cuts in education; and budget cuts that will absurdly stifle any economic recovery. It is true that if the State of Illinois “does not [create] a contemporary tax system, one that is both sound and responsive to the needs of state, basic and necessary programs face the chopping block” (Center for Tax and Budget Accountability, CTBA).
Consider, for example, budget cuts in K through 12 and higher education: “disparities in [the state’s] school funding and, therefore, quality of education, would be significantly reduced if the primary basis for school funding was on state revenues,” and that is why Illinois is “next to last in a ranking of states based on funds spent on education” (CTBA). As it is now, property taxes used as the main sources of revenue for school funding guarantee income inequalities among school districts throughout the State of Illinois.
Let’s be concerned about why the State of Illinois cannot obtain more revenue. Besides federal sources of income, the state uses only eleven sources of revenue: personal income tax (but note that Illinois was tied for the fourth lowest individual tax rate on households in the top income bracket), corporate income tax (note the recent extortionate tax breaks given to some Illinois corporations), sales tax (note that Illinois does not tax services like most other states for another significant source of revenue), corporate franchise tax and fees, public utility taxes, vehicle use tax, inheritance tax, insurance taxes and fees, cigarette taxes, liquor taxes and other miscellaneous (or rather unsubstantial) tax sources (Commission on Government Forecasting and Accountability, June 2011). In regards to sales taxes, “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… [States that do not tax services, such as Illinois], probably could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively” (the Center on Budget and Policy Priorities, July 2009). Consider that a broader-based taxation system would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (CTBA). As long as our legislators play their political ping pong game with one another and prioritize their own self-interests first, it is impossible to obtain any just resolutions to the state’s budget problems.
A case in point: reflect upon this potential financial windfall for corporations considered by legislators who are also ironically contemplating budget cuts and pension reform for the rest of us: “A package of tax breaks aimed at helping business and keeping a few high-profile companies from leaving Illinois could cost the government $850 million a year in its current form, raising the possibility that it will have to be scaled back to win approval from the Legislature. The package started as a move to lower the tax bill for two Chicago-based financial exchanges, CME Group Inc. and CBOE Holdings Inc., which are threatening to leave Illinois. Then a tax break for Sears was added to the mix. That was followed by tax incentives for businesses in general, and then measures to help poor families. Each new tax break means less money to run state government, requiring officials to get more money elsewhere or cut services… State government would have to absorb most of that loss, but 6 percent — or about $50 million — would hit the budgets of local governments across Illinois” (Associated Press, November 18, 2011). Does this seem preposterous in light of the aforementioned tax inequities already discussed?
So why can’t the State of Illinois provide a fair and sound tax system (Illinois is one of seven states with a regressive flat-rate tax), one that is “efficient with minimal impact on the economic decisions that taxpayers have to make” (CTBA), one that captures increased revenues in times of economic growth, one that maintains revenue collections during poor economic times, one that is simple and not liable to inconspicuous error, one that is transparent and builds trust with the state’s government officials (CTBA), and one that helps 99 percent of the state’s population? Why? The answer is that most legislators in the State of Illinois prefer the easy way out of a difficult and challenging situation. The State of Illinois will not have a fair and sound tax system until it addresses the most important cause of our budget deficits through significant state tax reform, and that will occur only when our legislators begin to represent the 99 percent of the state’s population instead of their own self-interests and the wealthy one percent that bankrolls them.
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