Illinois' budget problems won't be fixed without change in revenue structure
When it comes to Illinois' fiscal system, the adage "the more things change, the more they stay the same" rings hollow. It'd be far more fitting to recognize that in this state, the more things stay the same, the worse things get, at least from a fiscal standpoint. For proof, look no further than this past November, when voters failed to ratify a proposed change to the state's 1970 constitution that would have permitted Illinois to replace its flat rate income tax with a graduated one. This effectively left one of the core aspects of Illinois fiscal policy the same way it's been for over 50 years. And that decision had consequences, none of them good.
For starters, it left Illinois stuck with its long-standing, flat rate income tax. This outcome was something other than desirable, given the central role this flat rate income tax has played in driving Illinois' incessant, and substantial, General Fund deficits.
How substantial? Current estimates are the General Fund deficit will reach $13 billion by the end of FY 2022 -- which means Illinois won't have the revenue needed to cover almost half of anticipated FY 2022 expenditures on services. That's a real cause for concern, given over 95 percent of all General Fund spending on services goes to the four, core areas of education, health care, human services, and public safety.
Sure, a portion of this deficit will resolve itself once the revenue shortfalls caused by the pandemic end. That said, the crux of Illinois' fiscal problems have nothing to do with COVID-19, and everything to do with structural flaws in the state's tax policy -- the flat rate income tax being key among them.
A flat-rate income tax is structurally unsound because it cannot respond to how income growth is actually distributed in the modern economy. Consider that, since 1979, the annual earnings of most low- and middle-income workers in Illinois have been flat or declining after inflation. During that same sequence, the real earnings of affluent individuals jumped from an annual average of $411,177, to an annual average of over $1.45 million, a whopping increase of over 254 percent.
The only way an income tax can generate revenue that grows with the economy over time is to respond to this trend by imposing higher tax rates on higher levels of income. Obviously, this is something a flat rate can't do, by design. Over the long haul, this design flaw constrains revenue growth to the point where it can't even cover the cost of maintaining the same level of public services from one fiscal year into the next. That's the textbook definition of a "structural deficit."
The way to eliminate a structural deficit driven by flawed tax policy, is to, well, actually reform tax policy to work in the modern economy and raise the revenue needed to fund core services. Yes, this task was made trickier when voters failed to ratify the amendment to Illinois' constitution that would have permitted the state to implement a graduated rate income tax. However, even with a flat rate, decision-makers can still raise revenue needed to help reduce the structural deficit -- and solely from the wealthy who've been realizing all the growth in income over time -- by increasing the income tax rate, and then providing targeted tax relief to low- and middle-income workers.
Unfortunately, many politicians refuse to support revenue increases, because they contend overspending on services is the cause of Illinois' deficits. The data, however, expose that contention for the canard it is. In fact, rather than contributing to deficit growth, over the last two decades General Fund spending on the four core services has been cut by around 23 percent in real, inflation adjusted terms.
Which brings Illinois to where it is today -- suffering from a long-term structural deficit that won't be eliminated unless politicians change the tax policy status quo -- and raise the revenue needed to sustain spending on core public services.
• Ralph Martire, firstname.lastname@example.org, is executive director of the Center for Tax and Budget Accountability, a fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.