On February 23, Kristina Rasmussen testified before the Illinois Senate Appropriations Committee on the State Budget. Included in her testimony are how a tax increase would affect families and business, why it's important to limit spending before raising taxes, and 15 specific, proactive reforms that could get Illinois back on the right track.
Testimony of Kristina Rasmussen, Executive Vice President, Illinois Policy Institute
Submitted to the Illinois Senate Appropriations I and Appropriations II Regarding the Deficit and Revenue Projection For FY 2010 and FY 2011
February 23, 2010
Chairman Trotter and Chairman Sullivan, thank you for the opportunity to testify today. My name is Kristina Rasmussen, and I am Executive Vice President with the Illinois Policy Institute. We are a nonpartisan research organization dedicated to supporting free market principles and liberty-based public policy initiatives. The Institute conducts research and analysis on a variety of matters, including fiscal policy, education, government reform, health care, and transportation. You can learn more about our organization by visiting www.IllinoisPolicy.org. Where We Stand Today
Fiscal Year 2011 is hardly unique in presenting Illinois residents with an unbalanced state government budget. Illinois ended calendar 2009 much in the way it ended 2008: red ink as far as the eye can see. Looking ahead, the total deficit for Fiscal Year 2011 is estimated in the billions of dollars – partially made up from the rollover of unpaid debt from previous years. Fiscal imbalance has become the norm, rather than the exception.
We can deliberate over the true size of today’s accumulated state’s deficit, debating whether or not items like the loss of “temporary” federal stimulus funds should be included in the calculus. But there’s more to examine than just the state’s ledger. We need to keep an eye on the bigger picture.
Illinois faces large economic problems that threaten our future prosperity. According to the ALEC-Laffer State Economic Competitiveness Index:
1. Illinois ranks third to last in economic performance; 2. Illinois ranks 3rd highest in net out-migration; and 3. Illinois is 48th in cumulative non-farm employment growth from 1997 through 2007.
In short, we’re losing the race for people and for jobs. Remember that Illinois competes with 49 other states and the rest of the world. The rules of the game that worked in the 1960s and 1970s no longer work. We can no longer afford a business and tax climate that is hostile to entrepreneurs, investors and workers.
Or as economists Arthur Laffer and Steve Moore put it, “Americans know how to use the moving van to escape high taxes.” They found that:
from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.
Whether 50%, 67%, or 150%, an Income Tax Hike Will Hurt Families and Businesses
Making it arbitrarily more expensive to live and work in Illinois with an income tax increase is no way to attract people back to the state, especially at a time when families and businesses of all sizes are watching every dime.
In spring 2009, Governor Pat Quinn announced plans to increase personal income taxes by 50 percent. Even with a higher personal exemption, a single taxpayer making as little as $14,000 would see their tax bill increase under a 50 percent personal income tax rate increase. Couples making more than $28,000 also would have to pay more in taxes, as would families of three earning in excess of $42,000. Others have suggested even higher rate increases.
Tax policy economist Scott Moody calculated that Governor Quinn’s personal income tax hike would cost the Illinois economy $8.6 billion in lost output over the long term. To put this massive sum into perspective, the hidden cost of the governor’s personal income tax hike is the economic equivalent of taking all the 2008 tax revenue from the sales tax, cigarette tax, liquor tax, inheritance tax, corporate franchise tax and fees, and insurance taxes and fees and dumping that money into Lake Michigan.
By asking Illinois taxpayers to send more of their money to government, it implies that there’s room to cut from family budgets. Here is a chart that breaks down household spending of the average Midwestern household by category.
Source: Federal Government, Compiled by Mackinac Center for Public Policy
What should Illinois families cut from their household budgets to make room for higher tax bills? Should Illinoisans buy less food? Cut back on insurance coverage? Move into cheaper housing? Buy fewer books? Forgo the next haircut? Cancel the upcoming road trip to grandma’s house? Save less for retirement?
“Soaking the rich” with a progressive income tax is not an “easy” way out. Aside from punishing hard work and success, when Connecticut, New Jersey, and New York increased their income tax rates over the 2002-2005 period, the “tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average.”
Increasing the corporate income tax is equally problematic. In 2009, Governor Quinn proposed increasing the corporate income tax rate from 4.8 percent to 7.2 percent. This, combined with a 2.5 percent “replacement tax” on business income, would give Illinois the fourth-highest corporate income tax rate in the nation at 9.7 percent. According to the non-partisan Tax Foundation: “With a 50 percent increase in the income tax rate, Illinois legislators would give up the state’s one tax climate advantage.” Illinoisans Already Pay A Lot in Taxes
Remember, Illinois already levies significant taxes on its residents.
We already have high sales taxes. Illinois has the 6th highest combined state and average local sales tax rate at 8.4 percent (as of September 29, 2009). Even with a recent rate reduction to “just” 9.75 percent, Chicago is still known as a sales tax sinkhole.
We already have high property taxes. Illinois ranked 7th highest in median real estate taxes paid in 2008, at $3,384. Illinois has the 6th-highest property taxes as a percentage of median home value. Illinois has the 5th-highest property taxes as a percentage of homeowner income. Seventeen out of the top 100 counties in a national list of property taxes paid on owner-occupied housing as a percentage of home value are in Illinois.
We already have high excise taxes. Illinois has the 6th-highest state gas tax. Illinois has high taxes on beer, wine, and spirits compared to nearby states. With a $1 tobacco tax increase, we’d have a higher rate than four of our neighboring states.
Illinoisans already pay a lot in taxes. Should Illinois increase its relatively moderate personal income tax, it would forfeit one of the best incentives for people to live and work in the state. Controlling Government Spending is Key
If we’re going to set Illinois back on the path to prosperity by balancing our budget without job-killing tax hikes, better controlling government spending must be the first priority.
State spending in Illinois has increased significantly over the past decade, even as the population remained relatively flat. Accounting for all appropriated spending, state outlays increased 39 percent after inflation between 1998 and 2008. Meanwhile, the population grew only 6.8 percent.
In 1998, state spending per citizen was $3,500. Ten years later, state spending per citizen was $4,600 (inflation adjusted).
Illinois received a record amount of revenue in 2008, and it managed to spend every dime. Until the state gets a handle on its spending proclivities, it’s going to face perennial budget issues.
Even though Illinois faced a dire budget situation last year, it managed to pass numerous laws that expanded government or increased costs. A few examples include:
Permitting the state-owned food buyers to spend up to 10 percent more than the lowest bid to buy locally grown produce, even when it could buy more food for less from elsewhere (HB3990);
Creating of a task force to study the implications of taxpayer financing for statewide, legislative and judicial offices (SB1466); and
Requiring all state agencies to use compost materials for all land maintenance (SB 1932).
Via the Illinois Policy Institute’s spending transparency website, www.IllinoisOpenGov.org, we found that the Department of Commerce and Economic Opportunity spent $10,000 on a “fee for agency participation in Dark Knight Gala” in Chicago. The Dark Knight Gala was an event honoring Christopher Nolan, the director of the most recent Batman films, and included a screening of The Dark Knight and a dinner reception. For the general public, tickets to the gala started at $150. Using taxpayer money to help fund a fancy party for a small group of people seems questionable at best.
I encourage to you read the Institute’s “2010 Illinois Piglet Book,” which details more questionable spending, including $6,500 paid to Bass Tubs by Hurt Promotions, which provides fishing seminars and demonstrations using a 4,000 gallon, 40-foot long tank filled with live fish. Beware Federal Bailouts Looking to the federal government for a fix to today’s budget crisis is far from ideal. After all, we’re all federal taxpayers as well as state taxpayers. Someone will eventually have to pay the piper.
There’s another aspect to consider. As heavily reported by news outlets throughout 2009 and 2010, human service providers bore the brunt of Illinois’ budget crunch. There’s an unlikely culprit at work: the federal stimulus legislation. The recovery bill forbade states from making significant changes to spending on education (couldn’t go lower than 2006 levels) and Medicaid (eligibility couldn’t be reduced beyond July 2008 levels).
The three big items in the Illinois budget are education (27 percent), Medicaid (30 percent) and human services (17 percent). When the federal government binds legislators’ hands and prevents them from touching two of these items, guess which one is going to be targeted? A more sensible option to our budget crisis would have been to spread cuts across all government programs, instead of piling the reductions on a few areas.
The next time the federal government comes along with a gift horse, we should take a closer look in its mouth. The federal stimulus money came with too high a cost: less local control over our own budgets and disproportionate reductions in human services. State leaders should be wary of future federal bailouts and the strings they’ll inevitably contain.
Looking Ahead: Proactive Reforms
Here are 15 policy steps to put Illinois’s budget on firmer footing.
Adopting the cost-cutting suggestions of Governor Quinn’s Taxpayer Action Board. As part of his March 2009 budget address, Governor Pat Quinn called for the creation of a Taxpayer Action Board to review state operations and identify efficiency savings. The board focused on the areas of government operations, public safety, education, pensions, Medicaid, human services, and public employee and retiree health care. They found that “substantial efficiencies can be gained by introducing new approaches, best practices, and sometimes simple modifications – with minimal if any change to the services enjoyed by constituents.” Cumulatively, the Board’s suggestions offered state government “an idea pool of several billion dollars in potential annual savings that could be implemented within the next five years – or in many cases, much sooner.” To date, no comprehensive action has been taken on the Taxpayer Action Board’s recommendations.
Passing the Illinois Efficient Government Act. A Council for Efficient Government would help “right-size” Illinois state government by fostering competition, efficiency, and innovation in service delivery to taxpayers. Essentially, a Council on Efficient Government would collect best business practices in competitive contracting and standardize how the state conducts itself in privatization and procurement initiatives. Florida’s Council on Efficient Government was developed in 2004 during former Governor Jeb Bush’s tenure. His administration realized more than $550 million in cost savings across more than 130 privatization and competition initiatives.
Developing a comprehensive inventory of state assets that can be sold or leased. Tough times call for creative thinking. Illinois state government owns a variety of assets that have the potential to be sold or leased. For example, Illinois state government could sell an estimated 2 million square feet in excess real estate space, which could yield $20 million to $60 million. The tollway could be leased to a private operator for an upfront payment and/ or annual revenue streams. By facilitating sound bidding and properly monitoring contracts, Illinois can reap significant benefits from selling and leasing assets.
Renegotiating public employee contracts. Just because an individual works for the government doesn’t mean that they should be immune from belt-tightening during economic downturns. Compensation packages for public employees are generous and can exceed what’s offered for similar positions outside of government. According to data from the Department of Labor’s Quarterly Census of Employment and Wages, Illinois state government workers received average annual pay of $56,682 in 2008. Private sector workers in Illinois received average annual pay of $48,981 – 15.7 percent less than state government’s average annual pay. Illinois should ensure public employee pay and benefits do not eclipse those offered for similar positions in the private sector.
Advancing Medicaid delivery reform. Illinois spends more than $11 billion a year on Medicaid, and more than 2.6 million Illinoisans are enrolled in the program. During the last 10 years, liabilities have grown at a rate of 6.9 percent a year (in part due to eligibility increases). Illinois needs to get a better handle on its Medicaid liabilities. This can be done by implementing a mandatory managed care system, rebalancing long-term care away from institutions toward lower-cost community care, and requesting a waiver from federal mandates in order to give Illinois a greater degree of flexibility in designing our system. By implementing reforms, we can begin to “bend the cost curve” and save $225 million in 2010 and $5.1 billion over the next five years. Additionally, once “maintenance of effort” requirements from the federal stimulus end, eligibility should be reduced so the program can re-focus on better care for the poorest of the poor.
Reviewing local revenue sharing. Illinois hands over 10 percent of state income tax receipts to localities via the Local Government Distributive Fund, costing $1.2 billion. Reducing or eliminating such transfers could help make more of the existing income tax revenue available for state use.
Appointing and empowering a Sunshine Commission. In late 2007, the Illinois Auditor General issued a report indicating that Illinois “does not have a comprehensive, consistent inventory of programs” it funds on a daily basis. A Sunshine Commission would carefully review state programs and then remove wasteful, fraudulent, ineffective or inefficient spending. While Governor Pat Quinn has officially created a Sunshine Commission, he has yet to name anybody to serve. Without leaders in place, the Commission isn’t able to begin its work.
Avoiding new spending boondoggles. When you’re trying to get out of a hole, at the very least you should stop digging. In 2009, Illinois designated $400 million in the capital bill to connect Chicago to St. Louis via high- speed rail. It also applied for over $4 billion in federal funding related to construction costs. The state has no real plan to pay for future operating and maintenance expenses, which will be in the tens of millions of dollars. This irresponsible approach to budgeting is what grows Illinois’s structural deficit, and it needs to stop.
Reforming Illinois’s public pension system. Illinois has an unfunded pension liability of $83 billion – which is the equivalent of three years’ worth of General Fund revenue. The state’s existing pension plan is no longer sustainable, and it requires adjustments for calculating benefits earned for future service. Governor Pat Quinn proposed modest reforms, such as adjusting the benefit formula and the retirement age. Unfortunately, he quickly backed down from pursuing these good ideas. For long-term reform, Illinois could follow the lead of states like Michigan in implementing a new form of pension plan, one that is based on defined contributions and not defined benefits.
Do away with barriers to business. Illinois has laws on the books that prevent entrepreneurs from breaking into certain industries where innovative new approaches can add value to the market. For example, household goods movers must prove to the Illinois Commerce Commission that “a public need for the service exists” prior to receiving a business license. Witnesses must testify to the commission under oath that they would use the new company’s services for a move. All the paperwork and demonstrations cost an aspiring mover $1,350. Agencies should compile lists of regulations that stand in the way of would-be entrepreneurs, and these barriers to growth and prosperity should be removed.
Protecting taxpayers with a supermajority requirement vote for higher taxes and fees. Too often, budget problems are addressed by trying to dig deeper into taxpayers’ pockets. A 3/5 supermajority vote on any legislation that would raise taxes or fees on Illinois families or businesses would put a stop to out-of-control spending, encourage prudent examination of spending plans before raising taxes, and, most importantly, bring back fiscal discipline to Illinois.
Implementing spending prioritization. Every day, Illinois families have to balance their spending decisions within their budget, and so should the state government. With spending prioritization, when a new spending program is added, lawmakers must offset the expense by eliminating an existing program that is outdated or ineffective.
Promoting choice in education. Education alternatives that allow students to go to better schools – while at the same time requiring less financial support from state and local governments – should be pursued. Vouchers and tuition tax credits should be looked at with a fresh perspective.
Putting an expenditure limit in place. Illinois can help prevent future deficits and ensure that the government does not grow beyond taxpayers’ ability to pay for it by passing an expenditure limit tied to population growth and inflation. Had such a measure been put into place at any time in the previous decade, Illinois’s budget would have grown at a more affordable rate.
Stop thinking that government is always the solution. An economic turnaround is not going to come from government; it will come from the small business owners, entrepreneurs, and “can do-ers” in the private sector that stand as the bedrock of America’s prosperity. Government should be asking itself what it can do to lower barriers to businesses and therefore job creation – not what it can do to squeeze more money out of taxpayers.
Conclusion This year should be a year of opportunity. A year to fix Illinois’s perennially busted budget.
Bold action is needed to stop the destructive habit of spending beyond our means. I’ve outlined 15 steps to help put Illinois’s budget on a firmer footing, and Governor Quinn will receive many more good ideas from residents across the state when he opens the online budget comment portal tomorrow.
Additionally, the Illinois Policy Institute will soon unveil our own version of the Fiscal Year 2011 budget, which will include department-by-department, line-by-line spending recommendations for balancing the books without a tax hike. I’ll make sure that each of your offices receives a copy of our proposal.
Today’s budget crisis is the result of many years’ worth of over spending. It’s going to take a few years to sort things out, but if we rededicate ourselves to prioritizing “needs” over “wants” and streamlining operations, there is hope for the future.
Thank you and I’d be happy to answer any questions.