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March 18, 2015

From a budgetary standpoint, Gov. Bruce Rauner inherited a hot mess.

He took office facing an accumulated deficit of some $7.4 billion in the state's general fund, which is daunting enough, given that the lion's share of the fund – over 91 percent – goes to education, health care, human services and public safety.

Making matters worse is that shortly before he was sworn in, the state's personal and corporate income tax rates declined by law, causing a $4.7 billion annual loss.

The net result: Rauner had to overcome a revenue shortfall of $12.1 billion when crafting his first budget.

That's challenging, but Rauner is making this budget thing more difficult than it needs to be by opting to introduce a budget that ignores the revenue side of the ledger, instead relying entirely on questionable spending cuts to resolve the state's fiscal mess.

By "questionable," I mean cuts that are either poor public policy – such as slashing funding for public universities and the Child Care Assistance Program for low-income, working parents – or unconstitutional, such as the $2.2 billion he proposes to save by reducing pension benefits for public workers.

All of this made his proposal predictably dead on arrival in a General Assembly controlled by Democrats.

Breaking the budget stalemate will be difficult given the chasm between what Rauner proposed and what Democrats will accept. However, a pathway for doing so was suggested by someone the governor knows well, trusts and can count on implicitly — candidate Rauner.

Candidate Rauner, in his fiscal policy position paper, the "Bring Back Blueprint," promised to pursue three tax policy initiatives to help generate more revenue for the state. He proposed eliminating ineffective corporate tax breaks, pushed expanding the sales tax base to include services and supported reducing the state’s income tax rates over four years.

All we got, however, were the income tax cuts – which worsen, rather than improve, the state's fiscal condition.

Even in the blueprint, candidate Rauner recognized that lowering income tax rates doesn't directly enhance state revenue. Instead, he claimed those tax cuts would create a "business-friendly" environment that would produce more jobs, and the workers filling those new jobs would pay state taxes, thereby enriching Illinois' coffers.

It's an interesting theory to be sure. It's also never worked in practice – not at the federal level, not in Kansas, not anywhere.

The other two initiatives candidate Rauner supported in the blueprint – eliminating ineffective corporate tax breaks and expanding the sales tax base – are great ideas.

Tax breaks offered to businesses are called "tax expenditures" because their net effect is the same as direct expenditures. The difference is that rather than collecting tax revenue and spending it on a public service, the state allows businesses to keep some tax revenue they'd otherwise have to pay, in exchange for providing a public good like economic growth.

So, if it turns out some business tax expenditures are not actually generating the desired public good, they should be ended, just like wasteful direct expenditures.

Candidate Rauner also was right to propose expanding Illinois' sales tax base to include services. From a tax policy standpoint, sales taxes are supposed to generate stable revenue for a fiscal system, even during down economic times.

To perform this function, the sales tax base has to include most transactions in the consumer economy. That generates stable revenue, because about 68 percent of all economic activity is consumer spending, and consumer spending doesn't decline precipitously even during down economic cycles.

Oh, and consumers predominately buy services. But unlike most of the 45 states with a sales tax, Illinois excludes most consumer services from its sales tax base. This flaw prevents Illinois' sales tax from playing its stabilizing role.

Here's hoping Gov. Rauner introduces the rest of candidate Rauner's fiscal platform.

Source: State Journal-Register