Republican plan perpetuates Illinois’ financial crisis

Ted Dabrowski

Vice President of Policy

Ted Dabrowski

John Klingner

Policy Analyst

John Klingner
June 21, 2017

Republican plan perpetuates Illinois’ financial crisis

The Illinois Republicans’ budget proposal includes billions in tax hikes and has an ineffective spending “cap” that will likely result in deficit spending by 2020. The plan’s lack of reforms sets taxpayers up for a permanent tax hike in 2022.

The Illinois Republicans’ “Capitol Compromise” plan is set to perpetuate the financial disaster for Illinoisans and the state budget. It hits taxpayers with $5 billion in tax hikes because it lacks the structural spending reforms the state needs to escape its current downward spiral.

And despite the tax hike – a 32 percent increase – state spending is likely to return to a deficit by 2020.

The plan’s $36 billion spending “cap” also won’t stop spending drivers such as pensions and debt from continuing to grow. The spending cap will be heavily tested in 2020.

The current plan is set to be a repeat of the 2011 tax hike failure, when politicians left the state on a budgetary cliff. The plan’s lack of structural reforms means politicians will push spending so high they’ll likely try to prevent the income tax hike’s sunset in 2021, despite their promises to the contrary.

The Illinois Policy Institute reviewed a two-year House Republican budget summary. Even when using conservative assumptions of revenue and expenditure growth, the Institute found that the plan will only result in bad outcomes for Illinoisans.

The plan’s spending cap is doomed to fail

The Republican budget includes a four-year, $36 billion spending cap that gives lawmakers the appearance of financial responsibility.

It’s only an illusion. The cap only applies to state spending on “discretionary” items such as education, public safety and human services. It doesn’t apply to growth in pension, debt and employee health insurance costs. These three costs alone make up almost one-third of the budget and are some of the largest cost drivers of state government spending. A spending cap that excludes these costs isn’t a cap at all.

Even the cap on discretionary spending won’t work. Lawmakers won’t be able to resist the pressure to increase spending on items such as human services and public safety.

The Republican budget plan already calls for 5 percent across-the-board cuts to many state departments in fiscal year 2018. The only way the $36 billion cap will work is if the state keeps spending at that reduced 2018 level through 2021 – a major feat for a state government that’s failed to control its spending for decades.

Even if discretionary costs were allowed to grow at just 1 percent annually in 2020 and 2021, the state would likely exceed its $36 billion spending cap in those years.

Cuts to core services won’t be tolerated for long. Officials and activists will demand their funding back. And knowing lawmakers’ previous record on spending, it’s very likely they’ll borrow to increase spending levels.

The cost of borrowing more money is allowed under the spending cap – which shows just how toothless the “cap” really is.

Illinois’ budget will be back to deficits by 2020

Even with $5 billion in tax hikes and a cap on some state spending, Illinois’ budget can still end up underwater in just three years.

A critical review of the Republicans’ budget plan shows that absent relatively robust tax revenue growth for Illinois, the state will have a deficit again by 2020.

Counting on strong revenue growth is risky. State revenues are already down 2.4 percent year-to-date compared with last year – showing early warning signals of a recession. Tax hikes could make the revenue situation even worse by weakening the economy and shrinking Illinois’ tax base even more.

Deficits are also likely to occur due to the growth in uncapped spending. Pension costs could rise due to new actuarial assumptions or a downturn in the stock market. Interest costs could increase due to emergency borrowing. And health care spending could continue to spike due to uncontrolled costs.

The plan sets the stage to make any ‘temporary tax hike’ permanent

The Republican budget plan relies on tax hikes, arbitrary operational cuts and other tricks to fix the state’s finances. But cuts and gimmicks are not structural reforms.

Little in the Capitol Compromise prevents the state’s spending drivers from growing at their historical, out-of-control levels.

By avoiding necessary spending reforms, lawmakers will have set the state up on another budgetary cliff after the new income tax rate hike sunsets in 2021.

Assuming state revenues and expenditures both grow at similar paces in 2020 and 2021, Illinois will face a deficit of approximately $5 billion by the time politicians promise the tax hike will sunset.

Illinoisans have seen this before – it’s the same thing that happened when the 2011 income tax hike sunsetted in 2015.

That tax hike generated $32 billion in new tax dollars from 2011-2014. The new money relieved pressure on politicians to change the status quo. Instead of enacting reforms, lawmakers spent the funds and left Illinois on a budgetary cliff.

The Republican plan will only result in the same situation.

The real solution

Illinoisans don’t need, nor can they afford, the Republicans’ “compromise” plan.

Nearly 80 percent of Illinoisans surveyed agreed that “Illinois state lawmakers should pass major structural reforms before passing any tax increase,” according to a recent poll conducted by Fabrizio, Lee & Associates and commissioned by the Illinois Policy Institute.

Illinois can no longer put off real spending reforms.

Politicians have to pass a balanced budget that actually solves the state’s structural problems without tax hikes. The Institute has laid out a plan – Budget Solutions 2018 – that does just that.

If lawmakers enact structural spending reforms now, such as 401(k)-style retirement plans for new state workers, reforms to state workers’ pay and benefits, reductions in higher education administrative costs, and efficiencies in Medicaid, a tax hike won’t be necessary to balance the budget.

That’s a far better outcome for Illinoisans than the Republicans’ “compromise.”

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