CIGARETTE TAX AND OTHER REVENUE OPTIONS FOR ILLINOIS

 

It's no secret that Illinois' fiscal system is in dire straits these days. The state's structural deficit has ballooned to over $3.2 million.  Human services have watched funding decrease by $387 million, or 10%, between 2001 and 2004, after adjusting for inflation.  And the unfunded pension liability has reached an alarming $40.7 billion.  And that's not all.

 

Illinois voters have sent a clear message to legislators that they want the state to invest more money in public education; state infrastructure such as public transportation, roads and bridges, and school buildings; and healthcare and human services.  Simply put: Illinois needs more money.

 

Word around the Capitol is that state leaders are considering a $1 increase in the cigarette tax in order to generate more money for Illinois.

 

The cigarette tax is a consumption tax or “excise” tax.  Excise taxes are applied on a per unit basis rather than based on a percentage of sales price.  Typical excise/consumption taxes in Illinois include both the cigarette tax and gasoline tax, which are assessed as a fixed charge, such as 10¢ per gallon or 50¢ per pack.

 

Excise taxes make a poor candidate for being part of comprehensive fiscal reform, for two reasons.  First, they tend to be regressive, taking more of a low-income person's annual wages than a wealthy person's.  Second, they grow more slowly than the economy, because they are unit-based rather than price-based.  To maintain revenues from excise taxes, frequent changes must be made in the rate, creating uncertainty about the level of taxation.  The primary value of increasing excise taxes is to get through short-term deficits, since the value of the excise tax will decrease over time.  To learn more, read an analysis from the Institute on Taxation and Economic Policy on why the cigarette tax is a weak source of revenue.

 

Click here to read a CTBA analysis and chart summarizing the various revenue options currently available in Illinois. These include the individual income tax, corporate income tax, sales tax, carbon tax, gaming, sale of the lottery and more.

 

Regressive taxes and the EITC

 

The potential regressive impact of any increase in the cigarette tax, or any other tax, should be negated by setting aside a portion of the proceeds to increase the value of the state's Earned Income Tax Credit (“EITC”).  For more information on the EITC, visit CTBA's website.  There is currently a bill (SB 338) awaiting the Governor's signature that will allow certain working families, such as some foster parents and parents of children permanently and totally disabled, to receive the full amount of the EITC to which they are entitled.  CTBA helped pass the bill in coordination with the Make Work Pay coalition.  For more information on SB 338, click here.

 

Click below to see how many people in your area receive the state's EITC:

• By Illinois State Senate districts

• By Illinois State House districts

What you can do:

 

1. Continue to call your legislators and the legislative leaders and tell them to pass a comprehensive school funding and fiscal plan that:

• Increases school funding and quality so that every child has access to a quality education,

• Restores Illinois' fiscal health, and

• Ends Illinois' over reliance on property taxes to fund schools.

2. Sign your organization onto the A+ Illinois Pledge of Support, stating that:

• We oppose a "no-growth" or "limited-growth" state budget.

• We support a responsible budget that adequately funds schools and other vital state services.

• We support an income tax increase dedicated to education.

SUPPORT TRANSIT FUNDING NOW! CALL YOUR STATE LEGISLATOR AND THE GOVERNOR

 

Pace Suburban Bus started hearings on proposed service cuts.  The Chicago Transit Authority (CTA) is struggling to address rail improvements.

 

Bring Illinois into the 21^st Century by supporting sustainable transit funding. The Northeast region has relied on a 24 year old funding formula that has not accommodated population growth or the loss of federal operating dollars eliminated over a decade ago. 

 

Call your legislators and Governor Blagojevich TODAY to urge them to support the funding and accountability reforms (SB 572, House Amendments 1 and 2) for the Regional Transportation Authority (RTA).   This is a good solution for the region and the state because it can reduce congestion and facilitate the movement of goods across the state and to the rest of the country.

 

These reforms will:

 

• Update the funding formula to restore fiscal health to the transit system and set it on a course for improvements and growth;

 

• Strengthen the RTA’s powers to ensure greater fiscal accountability from CTA, Pace and Metra and to evaluate performance and to improve coordination;

 

• Ensure 5-year strategic planning cycles that, among other objectives, take into consideration access to area jobs for low income communities, and;

 

• Create the Innovation, Coordination and Enhancement Fund as well as the Suburban Mobility Fund to furnish resources for demonstration projects and projects that address mobility for transit dependent populations.

 

(Legislation will eventually include reforms to the CTA pension so that expenditures are in-line with the new funding package.)

 

Every Vote Counts.  Since the legislature is now in an overtime session, every bill needs 3/5 majority in order to get passed out of its respective chamber.  That means that your state representative and senator play a critical role in the future of transit.

 

To contact your state Representative and Senator, click here.  To reach the Office of Governor Blagojevich, call (217) 782-0244 or (312) 814-2121.

 

RESOURCES:

• Hear from the Chair of the House Mass Transit Committee, Representative Julie Hamos (D-Evanston) about the legislation, go to www.juliehamos.org.

• Learn more about how transit is funded and planned, take a look at the primer, Transit Uncovered.

For more information, contact Dia Cirillo at 312-332-6522 or dcirillo@ctbaonline.org.

 

IRSI DIRECTOR RESPONDS TO ONE MEDIA PORTRAYAL OF ILLINOIS' PENSION PROBLEM

           

IN THE NEWS...

Is a 90 percent funding rate for Illinois state pensions prudent?  This was the question posed in an article in the July 9^th edition of the Daily Southtown.

 

While any major refinancing of the state’s unfunded pension liability ought to include elimination of the current pension ramp, which irresponsibly backloads costs, the benefits undeniably illustrate that Illinois should not only continue to aim for a high level of funding, but should possibly increase their expectations to a 100% funding goal.  Why?

 

1. Savings to current taxpayers.

The “normal cost” of a pension system is the contribution required from an employer to fund the plan’s benefits.  In the typical public sector defined benefit retirement system, normal cost is the annual percentage of total payroll a government employer must contribute to fund the promised benefit for its current workforce, based on actuarial tables.[1]  This contribution can be funded from a combination of tax revenue collected from the general public and investment returns earned on plan assets, if the returns are high enough to cover anticipated benefits, plus a portion of the employer’s current normal cost contribution.[2] 

 

Frequently, fully-funded defined benefit plans attain high enough investment returns that public sector employers are able to reduce the amount of normal cost paid from tax collections, freeing taxpayer revenue to cover services.[3]  This cost savings can be significant, as the experience of the Illinois Municipal Retirement Fund (“IMRF”) demonstrates. 

 

The IMRF, the second largest pension fund in Illinois covering public employees such as bus drivers, sewer workers and municipal administrators, has enjoyed a funding advantage for years, in large part because it has relentlessly  demanded full and on time payments from member government employers and employees and has consistently aimed for 100% funding.[4]  

 

At the beginning of 2003, IMRF was 101.5 percent funded on an actuarial basis.  If they had been 90 percent funded, they would have earned 2.7 billion ($3.0 billion times 90 percent).[5]  The difference would have been $300 million.[6]  That difference would have been paid by future taxpayers.[7] 

           

Additionally, as of December 31, 2006 IMRF employees and retirees had reached 100.5 percent of their funding pension obligations.[8]  Because of this, public employers within the IMRF will enjoy lower contribution rates in 2007.[9]  Rates will fall from an average 10.04 percent in 2006 to 9.72 percent this year, saving taxpayers millions.[10] 

 

2.  Future taxpayers are not burdened with higher taxes.

Delaying payment of the full expenses incurred by taxpayers in one year to future years places a greater burden on future generation of taxpayers.

 

It may make sense for future generations to pay for a municipal building with a 50 year life expectancy.  But, does it make sense for a taxpayer who moves into a state in 2004 to pay for services rendered by its employees in 1994, 1984, 1964 or 1954?

 

By paying less than 100% of current employee’s pension costs, future generations will be forced to pick up the tab.[11] 

 

3. Employees will continue to make their 100% contribution.

Throughout Illinois' historical underfunding of its pension systems, employees have always made on time and full contributions to the retirement fund. Is it fair for an employer to fund a retirement benefit at 90% while requiring employee to continue their 100% contribution?

 

Granted, the pension is fully funded at retirement, but why should new employees contribute only a fraction of the required contribution until they become vested or until they retire?  Just like units of government, employees would probably like to have more take home pay until they need to retire.[12] 

 

4. It is the pension industry standard.

The Government Accounting Standard Board requires funding for 100 percent.  Monies are set aside and invested.  Investment returns reduce future employer contributions. Investment returns generally represent the vast majority of retirement systems revenue.

 

Prefunding retirement obligations (IMRF) can be contrasted with pay-as-you-go retirement plans (Social Security).  The problems facing Social Security boil down to who will pay the cost of an ever growing group of retirees as the labor force slows in growth. At a national level in 2000, there were 4.8 workers for every person age 65 or older.  By 2030, that number is expected to decline around 2.9.[13]

 

Illinois faces the same demographic issues.  In 1999, the IMRF had 2.2 workers contributing for every 1 worker in retirement.  By 2015, this ratio is expected to decline to approximately 1 worker for every retiree and perhaps to go even lower by the time the last baby boomer retires.  Retirement funds need to build reserves to meet this challenge.[14] 

 

For more information please contact, Jourlande Gabriel,

Director of the Illinois Retirement Security Initiative,

at (312) 332-1103 or jgabriel@ctbaonline.org. 

 

The Illinois Retirement Security Initiative, a project of the Center for Tax and Budget Accountability, seeks to to ensure public retirement benefits in the state are adequately financed and designed to attract high quality employees to the public sector.

 

PAID LEAVE LEGISLATION WOULD HELP WORKING FAMILIES

 

Senate Bill 1681, the Family Leave Insurance Act, was recently introduced in Congress by Senators Chris Dodd (D-CT) and Ted Stevens (R-AK).  This landmark legislation will provide up to 8 weeks of paid leave to workers who need time off due to the birth or adoption of a child; to care for a child, spouse or parent with a serious illness; or to care for their own serious illness. The Act will work to benefit both businesses and their employees by creating a fund that employees, employers and the federal government will maintain and that will provide compensation for families in times of crisis. Some of the benefits of the Family Leave Insurance Act are:

• Eight weeks of paid leave throughout a twelve month period for pressing medical reasons accounted for under the Family Medical Leave Act (FMLA).

• Job protection is available for all employees eligible under FMLA.

• Benefits are tiered depending on wages: 100 percent of weekly earning are allotted to employees earning $20,000 and $30,000. The percentage slides down gradually to 40 percent for employees earning between $60,000 and $97,000.

Paid Leave Legislation in Illinois

 

Introduced February 22, 2007 in the Illinois General Assembly, HB 1683, the Family Leave Insurance Program (FLIP), offers employees similar benefits to those being set forth in the federal legislation recently introduced in Congress. These include partial wage replacement and 4 weeks of paid leave for pressing medical reasons covered under the Family Medical Leave Act. 

 

Women Employed has led the effort around the Family Leave Insurance Program and is currently working to build a statewide coalition of organizations who represent people who would benefit from receiving partial wage replacement during a family or medical leave.  If you would like more information on the FLIP legislation or would like to share a story regarding paid leave, click here.