Fixing Illinois: Politics and Policy in the Prairie State

Chapter 2. Fixing Past Budgeting Sins

ChaPTer 2 Fixing Past budgeting sins Persistent annual state budget deficits in the early twenty-first century and huge unfunded liabilities in our state pension systems have made Illinois a symbol of dereliction of fiscal responsibilities. That is why we make budgeting the first substantive chapter of this book. This chapter provides an overview of our fiscal system, discusses the major causes of the deficits the state has been sustaining, and provides suggestions for managing our resources more effectively, revamping our revenue system and balancing our state budget. Illinois has a rather typical state and local government revenue system. That is, the state imposes taxes on income and sales, and local governments impose a tax on property valuation, and state and local governments have established myriad other taxes and fees. In 2012, Illinois state government imposed twenty-six taxes and collected 1,504 separate fees.1 As can be seen in figures 2 and 3, in 2012 the state took in revenues of $64.5 billion and spent $67.9 billion.2 The individual income tax is the largest source of state revenue , at $17 billion. The property tax is in Illinois, and in most states, solely a local government revenue source. Not shown in figure 2 is the $26 billion generated locally in 2011 by the property tax for our state’s 6,020 local taxing units. Because state revenues and the local property tax are both utilized for school funding, a decrease in state revenues that results from, say, reducing taxes often results in increases in local property taxes. In 2011 the flat-rate individual income tax in Illinois was increased from 3 percent to 5 percent, and the rate of the corporate income tax from 7.3 22 ChaPTer 2 percent to 9.5 percent. The rates are temporary and are to begin a stair-step of reductions beginning January 1, 2015. It is not surprising that the significant rate increases of 2011 have raised the overall percentage of the state’s economic activity devoted to state and local taxes to 9.53 percent of gross domestic product in 2011, above the national average of 8.95 percent. This increased Illinois’s ranking among the states from twenty-ninth highest in 2009 to fifteenth highest in 2011.3 The Illinois revenue mix is typical, but not all states are typical. For example, neither Florida nor Texas, competitors of Illinois for economic development, has an income tax. Those states do benefit from heavy tourism and petroleum resources, respectively, yet the fact remains that Illinois policymakers should keep states such as these as well as neighboring states in mind when setting revenue policy for our state. Spending for health care and human services in FY2012 represented 37 percent of state spending, while that for all education was just 22 percent (see figure 3).4 The federal-state Medicaid program, which provides health care for low-income residents, alone accounts for more dollars than the state expends on education. In 1991 Medicaid accounted for less than half the amount the state spent on education.5 But persistent high rates of increase in healthcare spending since then, much steeper than the increase in the rate of inflation, Individual Income Tax, $17,000 Corporate Income Tax, $2,983 Sales Tax, $8,851 Public Utility Tax, $1,584 Lottery & Riverboat Gambling Tax, $2,113 Vehicle Licenses & Motor Fuel Tax, $2,822 Federal Sources, $14,593 Other Revenues, $13,108 Source: Traditional Budgetary Financial Report, Illinois Office of the Comptroller, 2013. FigUre 2. FY2012 state government revenues, excluding borrowing ($ in millions); total: $64,514 23 Fixing Past Budgeting Sins have forced a shift in the allocation of state dollars from education to health care. Over recent decades there has also been a sharp increase in spending for corrections, which now amounts to $1.3 billion. Spending for “General Government” in FY2012, which basically means support for the operations of state government, represented just 14 percent of total state spending. Indeed, most state spending is distributed in the form of support to local governments such as local public school districts, municipalities, and counties and to healthcare or human service providers, usually not-for-profit organizations. Crafting the annual illinois budget The state budget is the annual plan for spending from available resources. Budgets take in revenues and redistribute them through spending programs, generally from richer persons and regions to poorer ones. In 1989 the...