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January 16

CTBA Study Finds Illinois' Tax System Creates "Structural Deficit"

Release from the Center for Tax and Budget Accountability
 

A study issued today by the Center for Tax and Budget Accountability
(CTBA) at its Sixth Annual Fiscal Symposium shows that Illinois' state
deficit will increase by more than $6 Billion over the next five years,
without adding or expanding any programs. 
 
The study, Private Sector Job Trends and The Illinois Structural
Deficit: What Illinois' Changing Economy Means For The Demand For Public
Services and The State's Fiscal Capacity to Fund Them, finds that the $6
Billion increase is the result of a tax system that does not generate
enough revenue to continue funding the current level of public services
into the future, adjusting solely for inflation and population growth.
This fiscal mismatch is called a "structural deficit".
 
"Both revenue shortcomings and public service cost pressures have
combined to create the problem," said Chrissy Mancini, Director of
Budget and Policy Analysis at CTBA and author of the report.  "On the
revenue side factors contributing to the structural deficit include a
declining median wage in the state, a low, flat income tax that places a
much greater tax burden on low and middle income taxpayers than affluent
taxpayers, and a sales tax structure that fails to track the modern
economy.  On the cost side, factors such as inflation, rising healthcare
costs, and making up for previous failures to fund public employee
pensions, have created an increasing cost matrix that the state's
revenue system cannot satisfy."
 
In addition to an unsustainable state revenue system, the study also
found that increasing the number of high paying jobs in the state will
not solve the problem. The State of Working Illinois 2005  projected
that over the next ten years, less than half (only 41%) of all new jobs
created in Illinois will pay more than the state's current median wage.
Yet, even if the number of projected high paying jobs was substantially
increased to 60% of all new jobs, there would be only a minor reduction
in Illinois' growing structural deficit as the state would only gain an
additional $80 million in direct and indirect tax revenue per year over
the next decade.  This limited impact of high paying jobs on the state's
ability to generate revenue is a direct result of the longstanding
structural flaws in the state fiscal system that severely limit
Illinois' ability to generate revenue that responds adequately to
economic growth.
 
"Data shows that while expansion of some programs, particularly
education funding and Medicaid, have played a role in increasing the
state's structural deficit, it does not appear that inordinate or
wasteful spending is the major cause," stated Ralph Martire, Executive
Director of CTBA.  "Whether you analyze state spending as a percentage
of income in a state or by state gross product, you will find that
Illinois is a low spending state, ranking 42nd nationally, in spite of
having the fifth largest population and gross state product."
 
Further, the report found declining wage and benefit levels for workers,
coupled with the transition in the state's economy away from its
traditional manufacturing base and towards service sectors, can be
anticipated to challenge Illinois state government's ability to raise
revenue and provide the public services that will increasingly be
demanded. 
 
"The only real solution to the state's structural flaws is modernizing
the state's tax system so it grows with the economy and is not overly
reliant on the poor and middle class," said Mancini.  "Eliminating the
structural deficit and making the state solvent requires tax reform."
 
The report concludes that Illinois can accomplish sustainable tax reform
and maintain its overall, low-tax competitiveness, by following the
fundamental principles of sound, capitalist taxation; that is, taxation
should be fair, responsive to economic growth, stable during recessions,
and not over reliant on local property tax revenue.
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