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Our shameful fiscal system
Gov. Ryan makes his budget announcement next week, laying bare the current status of the state's fiscal health. Gazing into my crystal ball, it appears his message will be anything but upbeat. Everyone knows the state has a large revenue hole to fill. The number most frequently bandied about is $500 million, but recent rumblings out of Springfield indicate the problem could be much worse--say, in the $750 million to $900 million range.
The governor has warned everyone his new budget will contain painful spending cuts. Will the pain be spread around, so that everyone receiving government largess feels part of the pinch? Predictably, the answer is no.
The spending cuts the governor identified hurt hospitals, close prisons, fire workers and take away benefits from senior citizens, disabled people and low-income families. On the other hand, none of the proposed pain will be felt by those who receive corporate tax breaks.
And before you go worrying that this is some left-wing rant about how businesses don't pay their fair share, calm down. Some corporate tax incentives are important and necessary. The long-term economic and fiscal health of the state depends on businesses locating, staying and prospering in Illinois.
No, this isn't a general attack on corporate incentives. This is an attempt to balance things out. I mean, why is it appropriate to cut only programs that affect folks who don't have a legion of lobbyists representing their interests? In tough economic times, everyone should be squeezed a little--not just poor folks.
Some corporate tax breaks are so suspect that it should be a no- brainer to eliminate them. Take the state's recent enactment of the "single sales factor" method of determining corporate income tax liability.
Prior to 1998, the state used a three-part formula to figure out how much of a company's income would be subject to tax. The value of a company's property, payroll and sales in the state were weighed against the value of those items outside the state to determine what percentage of its income would be subject to Illinois tax. Under the single sales factor, the state considered only its sales in state vs. elsewhere.
The single sales factor was sold as an economic development tool. Proponents said it would create thousands of manufacturing jobs in Illinois, while generating additional revenue for the state's coffers. At the time, not everyone was sold on the idea. Then- Comptroller Loleta A. Didrickson believed it would cost the state millions of dollars in lost revenue and not produce any job growth.
History has shown that Didrickson was right. According to the Illinois Department of Revenue, single sales factor has cost Illinois about $96 million a year in lost corporate income tax revenue. Oh, and those new manufacturing jobs-- Illinois has lost manufacturing jobs.
I'm sure you've heard the clarion call for more accountability in government programs and subsidies. I agree. But accountability shouldn't be applied solely to social programs, it also should govern economic-development initiatives. Simply going back to the state's prior method of determining corporate income taxes will eliminate the need to make 20 percent of the "painful" cuts Ryan proposes.
There are even solutions available that hurt no one. Take the state's $226 million rainy day fund. The state used the money earlier this year to pay bills. Under existing law, it has to repay the money by fiscal year end. Passing legislation that defers or eliminates this obligation means the state would not have to make about half of the cuts Ryan proposed. Someone in Springfield must realize you shouldn't repay a rainy day fund during a monsoon.
Short-term solutions may get us through this crisis, but they won't solve the problem. We can't keep applying Band-Aids to our state's sick fiscal system. We either get serious about long-term, systemic reform, or start preparations to bury the patient.
Guidance is coming. The Institute for Tax and Economic Policy, a respected national think tank, has reviewed the Illinois fiscal system to identify its strengths and weaknesses. The Institute found many more weaknesses than strengths. Richard Sims, one of the lead economists who worked on the study, said, "A state's fiscal system should look like somebody planned it, and if you planned this, you should be ashamed."
And ashamed we should be. Not just because our fiscal system doesn't work, but because of the pain this failure causes to real people. The crisis may be fiscal, but the costs are human.
Ralph Martire is executive director for the Center for Tax and Budget Accountability, a bipartisan think tank committed to ensuring the Illinois tax system is both fair and sound.
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