Josh Dwyer
Director of Education Reform

The big news from the Chicago Public Schools school board meeting is that Ericson, Garvey, Jackson and Manierre schools will remain open.

Still, 50 other schools are on the chopping block. Forty-eight schools will close in June. Canter Elementary will get a one-year reprieve and Attucks Elementary will close at the end of the 2014-2015 school year.

These actions followed a contentious eight-month process, where CPS and the Chicago Teachers Union have each made a number of missteps.

CPS’s reasoning for the school closings has been confused since the process began. At first, its primary justification was to save money, citing data that showed a cost-savings of $500,000 to $800,000 per school.

When people began questioning those numbers, CPS’s story changed. Instead of being primarily about cost savings, the school closings were being undertaken to move kids out of the poorest-performing schools in the city.

But that argument only lasted for a few days. Opponents of the school closings went to the media with a study conducted by the University of Chicago’s Consortium on School Research, which showed that eight of 10 Chicago students displaced by school closings in the past have transferred to worse-performing schools than ones they were attending.

Now, CPS is citing both reasons for the school closings, though they are forecasting more than $100 million less in savings.

With enrollment in traditional CPS schools declining by 80,000 – more than 18 percent – since 2003, and no reason to expect the trend to reverse on its own, some sort of consolidation was inevitable. The shifting rationales and shaky budget math leave plenty of reason to doubt that CPS handled this situation well. 

Despite the vote, it is unlikely that the feud between CPS and the CTU will end any time soon. In fact, the union has already filed lawsuits alleging that the school closings violate the Americans with Disabilities Act and the Illinois Civil Rights Act.

Lost within this back and forth, though, are the parents and students who will bear the brunt of this decision.

Understandably, they have many concerns. Some parents are fearful that their children will be attending a lower-performing school while others worry whether child will come home at after school lets out.

Chicago’s students would be better served if parents were given the power and the financial resources to decide for themselves which schools their children should attend.

To learn more about the CTU’s role in the school closings, check back in tomorrow to read a blog post by our Director of Labor Policy.

QUOTE OF THE DAY

WSJ: The Apple Tax Diversion

You almost have to admire Carl Levin's timing. Amid a furor over politicized IRS tax enforcement, the Michigan Democrat on Tuesday tried to change the subject to a hardy Washington perennial—corporate tax loopholes. Too bad his designated business pinata, Apple, demonstrates instead the insanity of the tax code that Mr. Levin has done so much to write.

Mr. Levin unveiled the results of his months-long investigation into Apple's corporate taxes and accused the American business success of employing "alchemy" and "gimmickry" to lower its tax bill. What Mr. Levin did not do was present any evidence of anything illegal or even inappropriate. He did prove that Apple has smart accountants and tax lawyers.

Mr. Levin is outraged that Apple subsidiaries in Ireland pay little or no corporate income tax on profits generated from Apple's international sales. Ireland has a laudably low corporate tax rate of 12.5% to attract jobs and capital, but it turns out that for certain corporations controlled by entities outside Ireland, the deal gets better.

The Apple units are based in Ireland, so U.S. law does not consider them to be U.S. corporations subject to U.S. corporate tax. But since they are managed and controlled by Apple in the U.S., Irish law doesn't consider them Irish companies and thus they are also not subject to the 12.5% Irish corporate tax. This isn't alchemy; it's accountancy.

Mr. Levin claims that as a result one Apple subsidiary reported net income of $30 billion from 2009-2012 but didn't pay any corporate income tax. Apple says that since 2003 its Irish subsidiaries have paid a corporate rate of "2% or less," though it has also created some 4,000 Irish jobs.

None of this required a Senate "investigation" to discover because Apple is constantly inspected by the IRS and other tax authorities. These tax collectors are well aware of Apple's corporate structure, which has remained essentially the same since 1980. An Apple executive said Tuesday that the company's annual U.S. tax return adds up to a stack of paperwork more than two feet high.

Businessweek: Ten Reasons Tim Cook Dominated Congress

“I think it’s important that we tell our story,” Apple Chief Executive Officer Tim Cook told the Senate’s Permanent Subcommittee on Investigations on Tuesday. “I’d like people to hear it from me.” That seemed a daunting task, since the story the senators wanted to hear was why Apple (AAPL) avoided paying U.S. taxes on at least $74 billion in sales between 2009 and 2012 by shifting its intellectual property rights overseas. Yet over the next three hours, Cook spun a tale worthy of Mark Twain and emerged not only intact but unscathed. No one laid a glove on him.

The facts, as they were framed in a report from the subcommittee, were hardly flattering. Apple didn’t just avoid paying U.S. taxes, didn’t just stash its IP in Europe, but actually took advantage of international tax laws to create what are in effect stateless entities that are not required to file tax returns anywhere in the world—an achievement subcommittee Chairman Carl Levin (D-Mich.) characterized as “the Holy Grail of tax avoidance.” Nevertheless, besides a few tense exchanges with Levin toward the hearing’s end—exchanges that Cook mostly ducked—Apple’s representatives emerged in far better shape than they had any right to expect. Cook, in particular, shone. I counted 10 reasons why he fared so well:

1) Flattery. Cook mentioned repeatedly how much he admired the committee’s ranking member, Senator John McCain (R-Ariz.), laughed at various senators’ tired jokes, and addressed all of his inquisitors as “sir.”

2) Reframing. Early on, McCain was the most aggressive questioner; several times he tried to get Cook to agree that Apple’s tax practices appeared to be unfair and left smaller domestic competitors—unable to avail themselves of low international tax rates—at a disadvantage. Cook, projecting earnest sincerity, gently but firmly disagreed, saying he just did not view it that way and insisting that Apple’s tax practices were reasonable and fair.

3) Submission. In an obvious attempt to blunt criticism that the committee had unfairly targeted Apple, McCain asked Cook whether he felt that he had been “hauled” before the Senate and whether he hadn’t actually chosen to testify himself. Cook politely assented to this and added (with a straight face) what a pleasure it was for him to be present and have the opportunity to “share Apple’s story.”

4) Star Wattage. McCain lauded Cook’s “toughness” and wondered, with towel-snapping jocularity, “Why the hell I have to keep updating the apps on my iPhone all the time?” Senator Ron Johnson (R-Wisc.) lauded “your excellent products.” Senator Claire McCaskill (D-Mo.) burbled about “the many thousands of dollars you’ve gotten from me.” Even Levin whipped out his iPhone and bragged about his granddaughter’s prowess with it. You don’t see star-struck senators when Halliburton (HAL) executives are testifying.

5) Weak Questioners. Cook had a far better grasp of tax policy—not just Apple’s taxes, but tax policy generally—than almost every member of the committee. He was well-prepared. Senators such as McCaskill, who posed vague, meandering questions, were not.

WSJ: Nation's Debt Problem Hasn't Vanished

President Obama has raised the national debt by nearly $6.2 trillion, the equivalent of $78,385 per family of four. It is true that projected deficits recently have been reduced. April tax filings increased 28% from 2012, but much of this was thanks to a one-time rush at the end of 2012 to report income before rates rose in January. The second largest reduction in the deficit came from Fannie Mae FNMA +7.02% taking a one-time accounting adjustment.

But unless the economy soars, or a significant budget agreement is reached, the most lasting legacy of the Obama presidency will be a $10 trillion increase in the national debt—a burden that bodes ill for the nation's future.

Once the Federal Reserve's easy-money policy comes to an end and interest rates return to their post-World War II norms, the cost of servicing this debt will explode. The cost will increase further as the Fed sells down its $1.85 trillion holding of government bonds, and the Social Security system runs deeper and deeper into the red. The Treasury will then have to pay interest on an ever-growing percentage of the debt.

Since the World War II era, the average maturity of outstanding federal debt has been about five years, and the average interest cost on a five-year Treasury note has been 5.9%. At this interest rate, the expected cost of the Obama debt burden will eventually approach some $590 billion per year in perpetuity, exceeding the current annual cost of any federal program except Social Security.

An America forever burdened by massive government debt would have been unthinkable for much of the nation's history. Beginning with the Revolutionary War, the pattern has been that federal debt increased to help finance the nation's armed conflicts. But government spending after the wars dropped and debt was paid down, or even paid off, as under President Andrew Jackson in 1835.

Federal borrowing during the Civil War reached nearly $2.8 billion, about 30% of GDP. Thereafter the government ran surpluses and redeemed U.S. bonds that served as the reserve base of national banks and literally burned U.S. paper currency—greenbacks—in the furnace of the Treasury building. The money supply fell and federal spending plummeted to $352 million in 1896 from $1.3 billion in 1865.

These are policies that horrify modern Keynesian economists. Yet over that late 19th-century period real GDP and employment doubled, average annual real earnings rose by over 60%, and wholesale prices fell by 75%, thanks to marked improvements in productivity.

Forbes: It's The Taxes Hikes, Not The Spending Cuts, That Weigh On Growth

Although sequestration’s spending cuts grab headlines, the tax hikes are having greater fiscal effect. Unlike the much-mentioned March 1, sequester, the tax hikes began January 1, and are permanent. The disparate impacts and disproportional reaction have everything to do with Washington’s entitlement culture – that Washington feels entitled to tax and spend.

Washington began this year by definitively breaking with its recession mindset. Until then, the ostensible focus had been on protecting the economic recovery, regardless of budgetary impact. For this reason, the Bush tax cuts, which liberals had always vehemently opposed, had been extended and a 2% payroll tax break included.

The economy muddled along, with its strongest praise being that it didn’t reverse. However, the view of higher taxes as an economic deterrent evidently did – at least within the Administration.

On January 1, several large tax hikes (the largest being a return to Clinton-era top earner rates, an end to the 2% payroll tax break, and several Obamacare tax increases) went into effect. Unlike the Bush tax cuts, these increases are not temporary, but permanent.

Despite being now four months old and sizable, little mention has been made of them. Instead, all the attention has focused on the sequester’s $85 billion in spending cuts, mandated through this fiscal year (October 1). They amount to just 2.3% of what federal spending would have been and just 0.5% of projected GDP. Yet, to hear Washington tell it, you would think the entire economy rested on reversing them.

So what has been the comparative budget impact? According to the Congressional Budget Office, federal tax receipts over the last four months are running $164 billion ahead of where they were last year at the same time. While April’s receipts produced the biggest budget surplus in years, each of the year’s first four months has been ahead of 2012’s first four. With a third of the year over, receipts are up 19.8%.

Reason: The Obamacare Nightmare Scenario

At a congressional hearing yesterday with Gary Cohen, the Health and Human Services official charged with managing the implementation of Obamacare, Republican legislators charged that Cohen’s agency may be improperly allowing some states to run “assister” programs that pay people to help individuals sign up for the health law’s coverage options. Republicans charged that HHS may not have the statutory authority to fund those programs in states running their own exchanges. That includes states like California, which plans to use a significant part of the $910 million it has received so far in federal implementation grants to pay 21,000 such assisters $58 for each person successfully enrolled in new Obamacare coverage.

To most observers, this probably looked like a strictly technical dispute over the rules governing Obamacare’s implementation funding. But at the heart of the dispute is something much larger—the growing liberal concern over what might be called the Obamacare Nightmare Scenario: that too few people, who are too sick, will sign up for coverage under the law, that premiums will rise in the exchanges, and that this will reinforce public skepticism of the law as an unworkable burden whose primary effect is to cause costs to rise.

You don’t need to read between the lines to see this fear creeping into the left’s conversations about the law.

You can see it in former White House health adviser Ezekiel Emanuel’s recent Wall Street Journal op-ed, which warned that enrollment efforts needed more attention, because there’s no certainty about how many people will sign up for coverage under the law. “This uncertainty,” he wrote, “could set off a negative reinforcing cycle that undermines the entire exchange system.”

You can see it in Kathleen Sebelius calls to insurers, to friendly foundations, and to tax prep organizations asking them to “support” Enroll America, a nonprofit that is practically an extension of the administration—it’s led by a former Obama administration health official, and its entire mission is to sign people up for the new health law.

You can see it in the anxiety over California’s enrollment promotion. As The L.A. Times reported last year, “federal officials have a lot riding on the California effort,” which will be “an important test” of Obamacare in the face of GOP opposition. But it all “depends on getting enough people — healthy and unhealthy, uninsured and insured — to enroll. If that doesn't happen, the state could lose billions in federal dollars and insurance premiums could soar.” The piece says that California authorities expect to enroll 2 million people in private insurance through the law, and describes the challenge of getting people to enroll as “daunting.”

They’re right to worry. In part because, as Emanuel notes in his piece, this sort of enrollment push has never been tried at this scale. But also because a version of what they worry about—low enrollment, an unusually sick population, and spiraling costs—has happened before, in Obamacare’s first, smaller-scale attempt to expand coverage to the uninsured.

Boston Globe: Boston charter schools outperform traditional schools on key tests, study says

Boston charter schools outperform other public schools on three popular barometers of achievement — the MCAS, the SAT, and the Advanced Placement exams — but tend to have lower four-year graduation rates, according to a study being released Wednesday.

The biggest bounce in achievement occurred on the SAT. Charter school students on average scored 100 points higher than their peers in other public schools, according to the study, which was prepared by the School Effectiveness and Inequality Initiative at MIT.

The findings are expected to fuel a push to abolish a state-imposed cap on the number of charter schools. The study was commissioned by two philanthropic organizations that support efforts to expand charter schools, the Boston Foundation and NewSchools Venture Fund, headquartered in Oakland, Calif.

CNBC: US Home Sales Rise to Highest Level in More Than 3 Years

Sales of previously occupied U.S. homes ticked up last month to the highest level in three and a half years, helped by a jump in the number of houses for sale.

The National Association of Realtors said Wednesday that sales rose to a seasonally adjusted annual rate of 4.97 million, up from 4.94 million in March.

Home sales have risen 9.7 percent in the past 12 months, evidence that the housing market is still improving. But sales have been roughly flat since November. The supply of available homes remains tight and many potential buyers aren't able to get loans.

The number of homes for sale rose 12 percent in April from March to 2.16 million. But inventory is still almost 14 percent lower than a year earlier.

The increase in inventories partly reflects the beginning of the spring selling season. The supply of homes would be exhausted in 5.2 months at the current sales pace. That's below the typical level of about six months.

More Americans are interested in purchasing homes: buyer traffic has risen 31 percent in the past year, the Realtors' group said.

Rising demand and tight supply has pushed up prices. The median price of a home for sale jumped 11 percent last month from April 2012 to $192,800. That's the highest in nearly five years. The median is the figure halfway between the highest and lowest number.

Higher prices could encourage more people to sell homes, fueling further sales gains.

Real Clear Politics: IRS Official Lerner Pleads the Fifth

The Internal Revenue Service official at the center of the storm over the agency's targeting of conservative groups told Congress on Wednesday that she had done nothing wrong in the episode, and then invoked her constitutional right to refuse to answer lawmakers' questions.

In one of the most electric moments since the IRS controversy erupted nearly two weeks ago, Lois Lerner defended herself during a brief appearance before the House Oversight and Government Reform Committee. The committee is investigating the agency's improper targeting of tea party and other conservative groups seeking tax-exempt status, and Lerner oversees the IRS office that processes applications for that status.

"I have done nothing wrong," said a stern-looking Lerner, sitting next to three other witnesses and reading from a written statement. "I have not broken any laws. I have not violated any IRS rules or regulations and I have not provided false information to this or any other committee."

Lerner then said she would invoke her Fifth Amendment right to avoid incriminating herself. Nine minutes after she began speaking, committee Chairman Darrell Issa, R-Calif., excused her and Lerner left the hearing room through a rear door, escorted by her lawyer and several other men.

The men quickly whisked Lerner into an elevator, where several of the men physically pushed back television camera operators who were trying to film them.

Lerner's refusal to answer questions was not a surprise. Her attorney, William W. Taylor III, wrote a letter to the committee this week saying she would do so.

Lerner revealed the agency's targeting two weeks ago and apologized for the actions.

Crain's Chicago: Illinois got an unexpected $1.3B bump in revenue in April, but Topinka says it’s a fluke

Illinois' cash-short treasury took a surprising turn toward the black this spring. But it's an illusion, says Illinois Comptroller Judy Baar Topinka.

In a statement this morning, Ms. Topinka said the state got an unexpected $1.3 billion bump in April as taxpayers filed their returns. Ms. Topinka said she used the influx to pay some bills, with the backlog dropping from $8.5 billion at the start of April to "only" $5.8 billion now.

But the reason the extra money came in is that some wealthier taxpayers "accelerated transactions" to beat higher 2013 federal tax rates.

That's not going to continue, said Ms. Topinka, predicting that the state's IOU backlog will grow to $7.5 billion by August.

"Illinois must not let a strong tax season burn a hole in its pocket," Ms. Topinka concluded. "Illinois is the only state in the nation where $5.8 billion in unpaid bills sounds like real progress."

CARTOON OF THE DAY

Jonathan Ingram
Senior Fellow, Health Policy and Pension Reform

Illinois lawmakers set to decide whether or not to adopt ObamaCare's voluntary expansion of Medicaid may want to read a new study published in the Journal of New England Medicine.

In 2008, Oregon officials wanted to expand eligibility for their Medicaid program, but only had enough funding for 10,000 of the 90,000 eligible people wanting to sign up. So they held a lottery. And thus the Oregon Health Insurance Experiment was born.

Health economists used this unique opportunity to create the first-ever randomized, controlled study of the effect of Medicaid on patients' health. They would spend the next few years following those who won the lottery and those who did not to try and measure Medicaid's impact.

So what did they find? After two years of tracking the participants, the researchers found that “Medicaid coverage generated no significant improvements in measured physical health outcomes.” These patients showed no significant improvements, despite the fact that the Medicaid group ended up using much more health care than the control group, including use of emergency rooms.

This is even more troubling for Illinois, given the fact that Oregon's Medicaid program is in much better shape than our own. For starters, Oregon pays physicians about 30 percent more to treat Medicaid patients than Illinois does. It's no surprise, then, that Illinois doctors are 1.7 times as likely as Oregon doctors to stop taking new Medicaid patients.

Researchers cannot find health improvements that stem from Oregon's Medicaid program, which reimburses doctors at rates much higher than the national average. So how can Illinois lawmakers expect significant improvements from dumping hundreds of thousands of additional people into the state’s program, which has among the lowest reimbursement rates in the nation?

Instead of trying to segregate more people into a failing system, lawmakers should turn their attention to solving the very real issues in the Medicaid program today. They should be focused on fixing the program for the most vulnerable before they even think about piling hundreds of thousands of able-bodied, childless adults onto a safety net already ripping at the seams.

Scott Reeder
Illinois News Network

Just call it an Internet get-rich scheme that didn’t work out.

Only this time it’s the people of Illinois who were left holding the bag.

Two years ago, Illinois legislators passed the “Amazon tax,” a tax on Internet commerce designed to help fill state coffers.

Instead, it has generated only a tiny fraction of the revenue once projected and it has resulted in jobs leaving the state. 
 
The Amazon tax requires online retailers to pay Illinois taxes even if they don't have a physical presence in the state.

Opponents to the tax contend this goes against a requirement set by the U.S. Supreme Court in 1992 that establishes “physical presence” as having offices, branches, warehouses and employees in the state.
 
Legislators in Illinois redefined the term “physical presence” to include marketing affiliates based in Illinois – typically coupon or deal websites whose operators earn commissions for driving shopping traffic to an online retailer.
 
The political pitch for this legislation was the desire to establish “tax fairness” for brick-and-mortar businesses competing against online retailers. But lawmakers also had their eyes on how much money they thought it would generate. Senate President John Cullerton predicted at the time that it would generate $150 million a year.
 
But the law generated just $3.8 million between July 2011 and January 2012, according to Sue Hofer, a spokeswoman for the Illinois Department of Revenue. That would put the state was on pace to net $6.4 million from the tax by the end of that fiscal year.
 
But the state has since stopped tracking this data. Hofer said the state has no idea how much money – if any – the law is generating.
 
On top of that, a Cook County judge has ruled the law unconstitutional.
 
On Wednesday, the Illinois Supreme Court will hear the state’s appeal.
 
At issue before the high court is whether Illinois is unlawfully restricting interstate commerce by compelling firms without a physical presence in the state to collect sales tax on its behalf.
 
While there has been much focus on whether the law is constitutional, less attention has been paid to the unintended consequences of this new tax and how it is hurting Illinois’ business environment. 
 
“When this law passed, about 2,000 businesses left Illinois,” said Matthew Schaefer, a Lewiston, Maine, attorney representing the Performance Marketing Association, a trade group representing internet marketers and the plaintiff in the ongoing lawsuit.
 
In response to the law being passed, Amazon discontinued its relationship with all 9,000 of its Illinois affiliates, said Rebecca Madigan, executive director of the Performance Marketing Association.
 
“This was a hastily written, not well thought out and very definitely not a good decision for the people of Illinois,” said Brent Shelton, a spokesman for Fat Wallet, an Amazon affiliate. “It didn’t generate anywhere near the revenue that they thought it would and it caused businesses to leave the state.”

Fat Wallet is an Internet marketing firm that was based in Rockton, Ill. When the law passed, it moved its 50 employees five minutes away – to Beloit, Wis. The company’s labor force has since more than doubled, topping 100.
 
“There have been many other firms that have left Illinois or simply shut down since this law passed,” Madigan said. She added that often these online-type businesses are small and family owned.
 
“They call this the ‘Amazon tax,’ but often it is small businesses, not large ones like Amazon, that are most hurt,” she said.
 
“Another thing we don’t know is how much revenue the state has lost through these businesses moving out of state or simply shutting down,” Schaefer said. 
 
Madigan contends there is an ulterior motive behind some of those pushing for states to impose their own “Amazon taxes.”
 
“They very much want a national tax and they believe that if they impose enough pain on the state level they can create pressure to create a national tax,” she said.
 
A national “Amazon tax” sponsored by U.S. Senator Dick Durbin, D-Illinois, passed the Senate earlier this month. It now proceeds to the U.S. House of Representatives, where it faces an uncertain future.
 
The national bill would supplant ones passed by states and require online retailers to collect state and municipal sales taxes from across the nation.
 
Durbin is using many of the same ideas to pitch this new federal tax: namely, “economic fairness” and “leveling the playing field.”
 
The Internet sales tax issue is also being fought on the state level in legislatures and courts.
 
Illinois is the largest state where Amazon has dropped its affiliates, Schaefer said.
 
And the case to be argued Wednesday before the Illinois Supreme Court is particularly important, he said.
 
“This is a critical case,” Schaefer said. “These types of statutes are relatively new. And they have only been passed in eight or 10 states. … Ours is one of the only cases challenging the constitutionality of the law.”
 

Brian Costin
Director of Government Reform

The Illinois House voted by an 85-30 margin to raise the state’s speed limits today. Previously, the bill was approved in the Senate by a 41-6 margin.

If Gov. Pat Quinn signs this legislation, the speed limit on tollways and interstates would be raised to 70 mph, up from 65 mph. The maximum speed limit on other highways, roads and streets would be increased to 65 mph, up from 55 mph.

Quinn has been noncommittal on raising the speed limit.

Currently, Illinois has one of the lowest speed rates in the country.

Jonathan Ingram
Senior Fellow, Health Policy and Pension Reform

Back in January, Ralph Martire of the union-backed Center for Tax and Budget Accountability proposed what he called a “solution” for Illinois' pension crisis. This plan has been getting more attention lately. But before embracing it, lawmakers should ask: does this plan really solve the problem?

After all, Martire's plan is to leave the broken pension system untouched – the only change is how we pay for pensions. Here's how he described it:

Simply re-amortizing $85 billion of the unfunded liability into flat, annual debt payments of around $6.9 billion each through 2057 does the trick.

There's a lot going on here, so let's break it down piece by piece.

First, he wants to extend the repayment schedule, also known as the amortization period, to 2057. But, according to the Governmental Accounting Standards Board, “the maximum acceptable amortization period is 30 years.” Extending the repayment schedule to nearly 45 years would obviously violate standard accounting practices. The actuaries of all five state pension systems explain that the current repayment schedule, which only lasts through 2045, falls outside generally accepted actuarial standards. Illinois' state actuary plainly agrees, concluding that “under generally accepted actuarial standards, the funding method should be based as a minimum on achieving 100 percent funding within 30 years.” Indeed, the 30-year repayment schedule is at the outer range of acceptable repayment schedules. Moody's Investors Service new accounting rules, for example, shorten the repayment schedule to 20 years for purposes of measuring state and local governments' credit risks.

Second, even after extending the repayment schedule, Martire's plan only pays down $85 billion of the state's $97 billion unfunded liability. This, too, violates generally accepted actuarial standards. Under standard accounting practices, the funding target would be 100 percent. The state actuary, the actuaries of all five pension systems and the Governmental Accounting Standards Board all recommend a 100 percent funding target.

Third, Martire's contribution math is off. He says he wants to make “flat, annual debt payments of around $6.9 billion.” But the state's annual pension costs include more than just debt repayment. Those costs also include the “normal cost” of workers accruing new benefits. When you add the state's annual normal cost to Martire's $6.9 billion debt repayment contribution, the state would be on the hook for more than $8.6 billion in fiscal year 2014. For comparison, the state's pension contribution was nearly $5.9 billion in fiscal year 2013. Pumping more money into a broken pension system isn't a “solution.”

Finally, Martire's plan would keep in place the broken defined benefit system, meaning that the unfunded pension liability will continue to spiral out of control even if the state were able to afford his proposed payments. The majority of the state's pension debt comes from problems of the defined benefit structure, like missed investment targets, mistaken actuarial assumptions and benefit increases. His plan does nothing to shield taxpayers from these risks. So even if it were reasonable to extend the repayment schedule, pay down just $85 billion of the state's $97 billion unfunded liability and hike the state's annual pension contribution by billions of dollars, his plan would only work if the pension systems were perfect. We know that they are not.

That's not to say that the idea of paying down the debt on a level-dollar basis is a bad one. That's how most of us pay off our mortgages. It also prevents the reckless “pension ramp” that increases the state's costs year after year. That's why our plan to get Illinois out of the pension crisis pays down the remaining unfunded liability on a level-dollar basis.

But we couple this with real, substantive reforms. We get politicians out of the pension business altogether, giving government workers real control over their retirement dollars for all future work. Our plan cuts the unfunded liability in half and gets the systems fully funded in about 30 years. And our annual contribution is reduced $4.7 billion, about the same as we paid in fiscal year 2012.

We need real reforms, not just a new repayment plan.

Paul Kersey
Director of Labor Policy

National Review Reporter Andrew Stiles recently pointed out another group that may have had a hand in using federal tax law to persecute conservative and free market groups – the National Treasury Employees Union, or NTEU. This group represents Internal Revenue Service employees, and has strong partisan preferences. Stiles wrote:

The union endorsed Obama in both of his presidential runs and operates a political-action committee (PAC) that has donated $1.63 million to federal candidates and committees since 2008, more than 96 percent of it to help elect Democrats. During that period, IRS employees have contributed more than $67,000 to the PAC.

Colleen Kelley, the NTEU’s president, is a formidable person in her own right. She was appointed to the Federal Salary Council that sets wages throughout the federal government, and has a tendency to take political fights over the size of government personally: “This is the worst political climate for federal workers in decades … You see these current attacks, they’re nonstop. Literally everyday there’s a new one aimed at federal employees.”

The NTEU represents IRS employees and is in a position to protect them from internal disciplinary processes. And like nearly all government unions, it has a strong interest in the expansion of government. NTEU in particular stands to benefit from the complex tax laws created by ObamaCare. Among the many things that Congress should investigate over the coming weeks is whether or not the NTEU encouraged IRS employees to delay paperwork for conservative and free market oriented groups. They certainly had both the means and the motive to do so.

image credit: Erin Scott

Ben VanMetre
Senior Budget and Tax Policy Analyst

Contrary to what some groups would have you believe, Illinois had record levels of revenue in 2012:

The Wall Street Journal reported that “revenue from income taxes in Illinois was up almost 40% last year. That’s because state legislators approved a massive tax hike in 2011 to ease Illinois’ budget woes.”

Between 1994 and 2012, revenue from personal and corporate income taxes alone increased by 104 percent after adjusting for inflation. Even before the Great Recession and the subsequent record tax hike, Illinois’ income tax revenue had grown by 46 percent since 1994 after adjusting for inflation.

So where did all that money go?

Illinois’ total spending (the technical term for this is “Total Appropriated Funds Expenditures”) totaled $67.9 billion in 2012, according to data from the Illinois comptroller. This includes all monies received from state and federal sources. The state has direct control over some of these funds, while others are earmarked for specific purposes by state or federal laws.

In fiscal year 2012, the lion’s share of the total appropriated funds was spent on health care and social services (36.7 percent), and education (22.2 percent). Other spending drivers included general government (14.2 percent) and transportation (8.3 percent). Embedded in these spending numbers are Illinois’ fiscal year 2012 pension contributions and pension obligation bonds totaling nearly $7 billion.

Here is a breakdown of some of the biggest spenders:

• The agency that spent the most from the appropriated funds budget was the Department of Healthcare and Family Services with expenditures of $17 billion.

• Spending by the Department of Human Services was $5.3 billion. Of this total, $4.1 billion was spent for various grant programs.
  

• The agency that spent the second-largest amount was the State Board of Education with $8.8 billion; $4.4 billion was for payments to local school districts.
  

• Expenditures by higher education agencies were $3.6 billion; $985 million of the total was by the State Universities Retirement System.
  

• Expenditures by the Department of Revenue totaled $6.3 billion. Included in this total:

• $2.2 billion for refunds
• $1.2 billion for payments to local governments from the Local Government Distributive Fund
  
• $1.3 billion from the Personal Property Tax Replacement Fund

• Spending by the Department of Transportation was $5.6 billion; $2.8 billion of this total was for highway construction.
  

• The state treasurer spent $4.9 billion, nearly all of which went to debt service.
  

• Other agencies that had spending in excess of $1 billion include:
  

• State Employees Retirement System: $2.6 billion
  
• Teachers’ Retirement System: $2.5 billion
  
• Department of Corrections: $1.3 billion
  
• Department of Children and Family Services: $1.2 billion
  
• Department of Commerce and Economic Opportunity: $1 billion
  
• Department of Central Management Services: $1 billion
  

• The larger increases in spending from the previous year were:
  

• $2.2 billion by the Teachers’ Retirement System
• $918 million by the Universities Retirement System
• $663 million by the Department of State Lottery
• $592 million by the state treasurer.
  

Even with record revenues, Illinois is suffering – the state has a massive backlog of unpaid bills, the worst-funded pension system in the nation, the second-highest unemployment rate and the nation’s worst credit rating. These problems will take structural reforms, not more revenue.

The Illinois Policy Institute has laid out a plan to reform and modernize the way the state of Illinois budgets and spends taxpayer resources. These changes will certainly be difficult, but Illinois is worth fighting for.

QUOTE OF THE DAY

Chicago Tribune: Let DuPage pluck off useless government

There's a bill heading to Gov. Pat Quinn's desk that would make DuPage County a laboratory for efficient local government. It might even produce a magic trick: Watch this taxing body disappear!

The bill would let the DuPage County Board dissolve some government units by simply passing an ordinance. No, the board members couldn't go crazy. The law would require an audit and a six-month public review. Voters could seek a referendum to block the county board and save the local government.

It all creates a reasonable process that could mean: Presto! One of the 6,969 units of government in Illinois would be no more.

DuPage County Board Chairman Dan Cronin pushed this legislation after he ran into enormous obstacles in trying to eliminate one example of what he calls zombie governments.

The Timberlake Estates Sanitary District had handed all its responsibilities to another agency three decades ago but still showed up on property-tax bills. In April, 2011, Cronin's staff began an arcane process of mailings, door-to-door solicitations, public notices and legal submissions. In March — nearly two years after the process started — a judge finally signed off on eliminating the sanitary district.

Illinois has, by far, more local governments than any other state. DuPage County alone has more than 400 governments.

The bill approved by the House and Senate is narrowly drawn. It would provide DuPage County — and only DuPage County — with the authority to dissolve outdated or defunct agencies that are managed by governing boards appointed by the county. The bill could impact 13 entities, such as the Century Hill Street Lighting District, the Salt Creek Sanitary District and the Wheaton Mosquito Abatement District.

Would the world miss the Century Hill Street Lighting District, which has three trustees in charge of approving an annual levy of about $15,000 to pay for lights in a subdivision in unincorporated Naperville?

This is a modest, well-targeted bill, but it does help to draw attention to how much Illinois taxpayers get dinged for those 6,696 local governments.

Don't even get us started on townships ...

Removing unneeded layers of local government would help to deliver essential public services in a more efficient and cost-effective manner. It would help to eliminate the little fiefdoms that make it difficult for the region to plan and execute broadly on strategies for economic growth.

It would give taxpayers some relief. Have you looked at your property tax bill lately? You'll find a lot of claims on your money.

We encourage Quinn to sign the bill. We encourage Dan Cronin to keep pushing so this movement stretches beyond DuPage.

Politico: Senate investigators claim Apple sheltered $44 billion from taxes

Senate investigators accuse Apple of wiring together a complicated system to shield billions of dollars in international profits from both U.S. and foreign tax collectors.

A report released ahead of Apple CEO Tim Cook’s inaugural Capitol Hill appearance Tuesday alleges the tech giant took advantage of numerous U.S. tax loopholes and avoided U.S. taxes on $44 billion in offshore, taxable income between 2009 and 2012 — a characterization Apple flatly rejects.

The bipartisan Senate probe also charges for the first time that Apple’s long established foreign entities, based in Ireland, don’t actually have tax-resident status there or anywhere else. The company conducts most of its international business in the European country to take advantage of lower tax rates, according to the congressional report.

Despite the findings, lawmakers behind the inquiry did not describe Apple’s tax conduct as illegal — but they sharply rebuked the Cupertino, California-based tech heavyweight on Monday for its tactics.

Apple, meanwhile, emphasized it has contributed more than its fair share of jobs to the U.S. economy — and plenty of big bucks to the U.S. treasury, too. Its prepared testimony, also released Monday, said the company “pays all its required taxes, both in this country and abroad.” And Apple stressed it does not use “tax gimmicks.”

Washington Post: Rand Paul unloads on ‘bullying, berating and badgering’ of Apple

This much is clear from the first hour of the Senate Permanent Subcommittee on Investigations hearing on Apple’s steps to avoid paying billions in U.S. corporate income tax: It will be primarily an exercise in righteous indignation for the senators present; and there will be at least one lawmaker with a quite different take.

“Frankly, I’m offended by the tone and tenor of this hearing,” said Sen. Rand Paul (R-Ky) in his opening statement. “I’m offended by a $4 trillion government bullying, berating and badgering one of America’s greatest success stories.”

“If anyone should be on trial here, it should be Congress,” Paul continued. “I frankly think the committee should apologize to Apple. The Congress should be on trial here for creating a Byzantine and bizarre tax code.”

Paul aside, the bipartisan tone was one of assailing Apple for using Ireland-based shell companies to avoid U.S. corporate income tax. Said Sen. Carl Levin (D-Mich.), chairman of the subcommittee: “The offshore tax-avoidance tactics spotlighted by the subcommittee do real harm. They disadvantage domestic U.S. companies that aren’t in a position to reduce their tax bills using offshore tax gimmicks. They offload Apple’s tax burden onto other taxpayers – in particular, onto working families and small businesses. The lost tax revenue feeds a budget deficit that has reached troubling proportions, and has helped lead to round after round of budget slashing and the ill-advised sequestration now threatening our economic recovery.”

And ranking member John McCain (R-Ariz.) added, “Apple’s corporate tax strategy reflects a flawed corporate tax system that allows large multinational corporations to shift profits offshore to low-tax jurisdictions. For years, Apple has opted to forgo fully contributing to the U.S. treasury and to American society by shifting profits and circumventing U.S. taxes. In the last four years alone, Apple has avoided paying taxes on $44 billion in income.”

CNET: Cook hits back at tax critics, says Apple pays its fair share

After stewing in silence for a couple of hours as a parade of Senators and professional experts took turns portraying his company as a tax freeloader, CEO Tim Cook offered an impassioned defense of Apple as a solid corporate citizen.

Apple has become the largest corporate income tax payer in America," said Cook, adding that the company paid almost $6 billion in cash to the U.S. Treasury, or more than $16 million per day.

He said Apple pays "the taxes it owes. Every single dollar."

Cook also denied that Apple uses tax gimmicks. "We don't stash money on some Caribbean island," he said.

That was a pointed rebuttal to some of the comments made by several people earlier in the hearing, which kicked off with both Democrats and Republicans sharply criticizing Apple's tax avoidance policies.

New York Times: Before Tumblr, Founder Made Mom Proud. He Quit School

When David Karp was 14, he was clearly a bright teenager. Quiet, somewhat reclusive, bored with his classes at the Bronx High School of Science. He spent most of his free time in his bedroom, glued to his computer.

But instead of trying to pry him away from his machine or coaxing him outside to get some fresh air, his mother, Barbara Ackerman, had another solution: she suggested that he drop out of high school to be home-schooled.

“I saw him at school all day and absorbed all night into his computer,” said Ms. Ackerman, reached by phone Monday afternoon. “It became very clear that David needed the space to live his passion. Which was computers. All things computers.”

Clearly.

Now 26 years old, Mr. Karp never finished high school or enrolled in college. Instead, he played a significant role in several technology start-ups before founding Tumblr, the popular blogging service that agreed to be sold to Yahoo for $1.1 billion this week. With an expected $250 million from the deal, Mr. Karp joins a tiny circle of 20-something entrepreneurs, hoodie-wearing characters like Facebook’s Mark Zuckerberg and Foursquare’s Dennis Crowley, who have struck it rich before turning 30.

“When I first met David he was 20 years old and wearing sneakers and jeans,” said Bijan Sabet, a general partner at Spark Capital, who was one of the first people to invest in Tumblr. “But I knew he was one of these rare entrepreneurs that grew up on the Web and who could come up with an idea, build it himself, and then ship it that night.”

Since founding Tumblr six years ago, Mr. Karp has been admired for his programming skills and Web site design acumen but at times has been a polarizing figure in New York tech circles because he so often blogged about his personal life and party-hopping. He has popped up in the New York Post’s Page Six Magazine, and has been a recurring target for the gossip Web site Gawker, where he was labeled a “fameball,” a derogatory term for someone who has an unquenchable desire for fame.

Tall and willowy, with a mop of brown hair and piercing blue eyes, Mr. Karp typically dresses in jeans, a T-shirt and sneakers. He speaks at a rapid clip and, often, for minutes without stopping. Technically, he never graduated from high school, which he cracked in an interview is “hopefully not a condition of Yahoo employment.”

After dropping out and working for a time in small New York tech outfits, Mr. Karp made his way to Tokyo, where he worked for several months for a start-up. He returned to the United States and became the chief technology officer for UrbanBaby, an Internet message board for parents. CNET Networks bought UrbanBaby in 2006, and Mr. Karp took the several hundred thousand dollars he made from the sale to start his own company, called Davidville. One of Davidville’s projects was a simple blogging service called Tumblr.

Fast Company: Judge Rules Airbnb Violates NYC Hotel Law

Officials in New York have determined that Airbnb is illegal, despite efforts by the online firm to persuade the city otherwise. The law violated is the illegal hotel law, which prevents residents from renting out their property for less than 29 days. According to CNET, the law originally meant to prevent landlords from turning residential properties into hotels.

The ruling doesn't necessarily mean all Airbnb hosts will be cracked down on, as the city only enforces the rule when a complaint is filed. Airbnb responded with the following statement:

"This decision runs contrary to the stated intention and the plain text of New York law, so obviously we are disappointed. But more importantly, this decision makes it even more critical that New York law be clarified to make sure regular New Yorkers can occasionally rent out their own homes. There is universal agreement that occasional hosts like Nigel Warren were not the target of the 2010 law, but that agreement provides little comfort to the handful of people, like Nigel, who find themselves targeted by overzealous enforcement officials. It is time to fix this law and protect hosts who occasionally rent out their own homes. Eighty-seven percent of Airbnb hosts in New York list just a home they live in--they are average New Yorkers trying to make ends meet, not illegal hotels that should be subject to the 2010 law."

The case in question originally made a $7,000 demand on Airbnb host Nigel Warren, and originally included building and zoning code issues. Administrative Law Judge Clive Morrick, however, threw these latter issues out, and has fined Warren $2,400 for violating the illegal hotel law. "While breach of the condominium rules is not of itself a ground for sustaining this (notice), respondent was in breach (through Warren's acts) and the existence of the rule against rental for transient, hotel, or motel purposes is evidence that the unit owners were to restrict their use to permanent occupation," the judge wrote.

Airbnb intervened in Warren's case, arguing that allowing people to rent out rooms occasionally "supports the city's desire to preserve living accommodations because it allows tenant the ability to bolster their income and pay rent." The move could prove a headache for the firm's CEO, Brian Chesky, who has already dealt with enough anxiety since he came up with the idea for the website.

In June 2012 Fast Company's technology editor Chris Dannen wrote about being served a restraining order after his landlord realized Dannen was using Airbnb to rent out his apartment and make some extra cash ($20,000, to be accurate). "My landlord had caught on. When I delivered my rent at the beginning of the next month, I found the management company’s office under construction. It's now a hotel. The 'loft-style' rooms are now listed on Airbnb for $169 a night."

Will we see Airbnb, which doubled its listings in 2012, now lobbying for a change in the law? Probably.

Bloomberg: Illinois Pension Fix Seen in Best Rally Since 2011

Illinois debt is rallying the most since 2011 as investors bet lawmakers will end two decades of inaction and pass a measure to fix the worst-funded U.S. state pension system.

With 11 days left in the budget session, each legislative chamber has approved a pension-overhaul bill. The house plan will save $150 billion over 30 years, while the senate version, endorsed by public-employee unions, would cut the shortfall by about $50 billion. Passing either may halt downgrades that have made Illinois the lowest-rated state.

Illinois would join states such as New York and Rhode Island that have moved to reduce pension costs. States and localities faced more than $2 trillion in unfunded public-employee retirement obligations in 2010, according to Moody’s Investors Service.

“I would think they get a compromise this time -- the market will be pretty disappointed if they don’t,” said Tim McGregor, who oversees about $30 billion as director of municipal fixed-income at Northern Trust Corp. in Chicago. “Spreads have rallied in on the news, and they could widen pretty quickly if they don’t come to terms with anything.”

2011 Level

Taxable Illinois pension-obligation bonds maturing in June 2033 yielded 2.29 percentage points more than benchmark Treasuries May 13, four days after the Senate bill was approved, data compiled by Bloomberg show. That’s the smallest penalty since August 2011, when Standard & Poor’s rated the state two steps higher than its current A- grade.

Governor Pat Quinn, a 64-year-old Democrat, said in January that the pension challenge “has confounded legislatures and governors for 70 years.” The degree of underfunding accelerated in the past two decades as the state skipped required annual payments and issued general obligations starting in 2003 to cover pension costs. In March, the state settled with the U.S. Securities and Exchange Commission over charges it misled investors from 2005 to 2009 about retirement shortfalls.

The state’s public-employee retirement systems had about 43 percent of the assets needed to pay for pension obligations as of 2011, compared with the national median of about 72 percent, Bloomberg data show. The state faces a $97 billion retirement liability that’s crowding out other spending. Lawmakers are trying to resolve the squeeze by May 31, when the budget session is scheduled to end.

WSJ: The IRS and the Drive to Stop Free Speech

The unfolding IRS scandal is a symptom, not the disease.For decades, campaign-finance reform zealots have sought to limit core political speech through spending limits and disclosure requirements. More recently, they have claimed that it is wrong and dangerous for tax-exempt entities to engage in political speech.

The Obama administration shares these views, especially when conservative, small-government organizations are involved, and the IRS clearly got the message. While the agency must be investigated and reformed, the ultimate cure for these abuses is to unshackle political speech by all groups, including tax-exempt ones, from arbitrary and unconstitutional government regulation.

Beginning in March 2010, the IRS engaged in an unprecedented campaign of harassment against conservative groups, either through denials or delays in approving their tax-exempt-status applications, or through endless and burdensome audits.

In notable contrast, liberal and "progressive" organizations got approvals with remarkable speed. The most conspicuous example involves the Barack H. Obama Foundation, which was approved as tax exempt within a month by the then-head of the IRS tax-exempt branch, Lois Lerner. From media reports and firsthand accounts, we also know that the IRS disproportionately audited donors to conservative causes and leaked confidential tax information concerning conservative groups in violation of federal law.

This IRS politicization is not an isolated problem. It is an inevitable result of the broader efforts to regulate and, in fact, suppress political speech.

The IRS crackdown on tax-exemption approvals for conservative groups was directed at nonprofit social-welfare groups, often called 501(c)(4)s after the Internal Revenue Code section granting them tax-exempt status. Such groups do not have to disclose their donors and are exempt from most taxation, although donations to them generally aren't tax deductible.

Social-welfare organizations are permitted to engage in a range of political activities promoting their causes or beliefs, so long as these activities aren't their "primary purpose." This has been generally understood to mean that they must spend less than 50% of their total resources on political activities.

The IRS had little interest in 501(c)(4) political activities until the 2002 McCain-Feingold campaign-finance reform. That law barred dedicated political-advocacy groups from soliciting and spending soft money—funds that aren't subject to tight federal campaign-contribution limits and are used for issue advocacy and party-building.

This IRS restraint was doubtless reinforced by the fact that virtually all politically active (c)(4)s, mostly labor and environmental groups, were ideologically liberal and their activities were not attacked in the mainstream media or by the political establishment. Meanwhile, Republicans financed their political activities largely through candidate-specific campaigns and party and congressional committees.

CARTOON OF THE DAY