By Adam Schuster
Thursday, November 12, 2020
Illinois residents are used to being asked a hard
question, often by friends and family members who have fled the Prairie State
for lower-taxed and better-managed states: “Why do you stay in Illinois?”
Neighboring Indiana famously ran an “Illinoyed” advertising campaign for several
years, replete with billboards intended to encourage Illinois families and
businesses to move over the border. Taglines included, “Illinoyed by higher
taxes?” and, “Admit it. You find me fiscally attractive.”
Illinois is a hotbed of public corruption and holds the
nation’s lowest credit rating, with $261
billion in pension debt and a historically massive $7.4 billion budget
deficit for the current fiscal year.
It’s one of the worst-run states in the country.
Politicians here continue to rack up huge debt burdens and foist an
ever-increasing tab on taxpayers, even as taxpayers get less and less for their
money.
Yet on November 3, Illinois voters finally drew a line,
making it clear they want state leaders to focus on serious fiscal reforms. The
55 percent who rejected a progressive income tax (the “Fair Tax”) also provided
an answer for why they stay: It was Illinois politicians who ruined state
finances, not them, and they are not willing to give up the fight to fix those
finances. A state constitutional amendment to allow real pension reform is the
only way to win that fight.
But instead of getting the message, Governor J. B.
Pritzker (the most prominent backer of the Fair Tax) has so far promised only
more of the same. The day after the election, the governor said he would look
to slash spending on services by up to 15 percent across the board. Not only
that; a 20 percent tax increase on everyone — the middle class, the poor, and
small businesses included — was still on the table.
Paying more to get less is exactly the status quo voters
rejected when they turned down the Fair Tax.
Pritzker, a billionaire and the nation’s wealthiest
governor, spent $58 million of his own fortune trying to convince Illinoisans
his proposed tax hike would only affect “the rich” — or those making more than
$250,000 a year. But voters saw through the scheme, recognizing that the $3
billion raised from the initial rate increase would be a pittance next to the
state’s chronic debt and deficits. They understood that there would be more to
come.
Seniors worried the progressive tax would ultimately extend
to their retirement income. All 32 states with progressive taxes tax retirement
in some form, and state treasurer Michael Frerichs publicly admitted over the
summer that some proponents of the Fair Tax viewed it as the first step toward
clawing back revenue from those benefiting from the state’s largest tax
exemption.
By ending the old flat basis on which Illinois’s state
income tax was levied, the Fair Tax would have virtually guaranteed future tax
hikes on the middle class, even if the initial increase would only have hit the
top 3 percent. Illinois politicians have a long track record of breaking their
promises on taxes and spending. Polls consistently find that Illinois residents
have among the least trust in their elected officials of any state in the
country.
Who can blame them? Yet another corruption scandal filled
the news during the campaign, with Illinois House speaker Mike Madigan, the
most powerful politician in the state, at its center.
Absent the $3 billion in Fair Tax revenues, Pritzker will
need new ideas to present a balanced budget to the General Assembly for the
coming fiscal year. The exact size of the deficit is yet to be determined, but
it won’t be pretty. For fiscal years 2020 and 2021, the state will lose a
combined $6.3 billion in expected revenues as a result of the COVID-19 pandemic
and the measures taken to combat it. State pension costs will grow beyond the
previously expected $11 billion, owing to investment losses in volatile
markets.
Further short-term borrowing should be avoided as much as
possible, lest the state trigger a formal downgrade to non-investment “junk”
status by ratings agencies. The state’s backlog of unpaid bills is growing
again, sitting at $9.2 billion as of November 9. Short-term borrowing was used
to paper over deficits for the current and prior budget years, and repayment of
that borrowing leaves $2 billion less for future years before even adding
interest costs.
Income-tax hikes and a 15 percent hatchet to
discretionary state spending is also the wrong path.
Voters rejected income-tax hikes when they overwhelmingly
said “no” to the Fair Tax which was likely the most politically palatable tax
hike the governor could have devised amid business shutdowns and continued high
unemployment. Besides, two major income-tax hikes in the past decade already
failed to restore the state’s financial position. Illinois’ net debt more than
quadrupled over that period despite the state taking in $8.7 billion more in
annual revenue. But those tax increases did succeed in further slowing
Illinois’s weak economy. They also helped drive the nation’s worst population
loss over the past decade.
Many of the state’s most vital programs already have been
cut close to the bone because of the pension crisis. Inflation-adjusted
spending on the state’s pension systems grew 501 percent from fiscal year 2000
to 2020. That increase led to a 32 percent drop in spending on a range of core
government services. Higher taxes were accompanied by disinvestment in public
safety, public-health programs, higher-education spending, and services for the
poor and disadvantaged.
The pension crisis lies at the heart of Illinois’ most
severe economic and fiscal challenges. Fixing it is the key to any workable
budget solution.
A “Hold Harmless” pension reform plan developed by the
Illinois Policy Institute could save the state roughly $2 billion per year in
annual pension contributions and $50 billion over the next 25 years, after
which Illinois pension debt would be fully eliminated. The plan would protect
pensioners’ earned benefits while reducing the future growth in benefits to a
level that is sustainable and affordable, through modest changes such as
replacing guaranteed 3 percent post-retirement raises with a true cost-of-living
adjustment tied to inflation. It would also protect public servants’ retirement
benefits from the prospect of total insolvency that looms without reform.
Moreover, pension reform would ensure that as much of
Illinois’s scarce resources as possible are invested in the things people want
and need the most, allowing lawmakers to target any needed cuts in the
operating budget to less important (or less effective) government services and
programs. The state already collects outcome data on the effectiveness of state
spending through an initiative called “Budgeting for Results,” but lawmakers
have yet to use that information to prioritize state spending.
Outcome-based budgeting offers a way to cut spending with
a scalpel rather than the indiscriminate 15 percent across-the-board butchery
discussed by Pritzker.
For example, more savings can be found in cutting down on
duplicative and wasteful bureaucracy in school-district administration.
Illinois spends double the national average on general administrative costs per
student. If it matched the average, it would spend $708 million less annually.
Such reforms could increase resources for students and classrooms, where funds
are most effectively spent, while still saving the state money.
These ideas — pension reform, most of all — would require
Pritzker to buck certain special-interest constituencies such as the
public-sector-union leaders who have been among his closest allies to date. But
it is a necessary step to prevent Illinois from collapsing under the weight of
its mathematically unsustainable pension debt.
If he instead chooses to stick by the special interests,
cutting vital services, and hiking everyone’s taxes, he’ll face Illinois
taxpayers who are sick of asking themselves why they stay in their home state
and who are ready for transformational change. He will have to explain why he
is still asking them to pay more and get less, rather than pursuing a new path
that would leave the whole state better off.
No comments:
Post a Comment