Understanding why the new budget fails Illinoisans
Tax hikes on struggling Illinoisans as the state is bordering on a recession, a lack of structural spending reforms, no true pension reform, $100 million in pork spending, and the continued threat of a junk credit rating are among the ways the new Illinois budget fails taxpayers.
Illinois has a full-year budget for the first time in just over two years, but the financial crises plaguing the state are no closer to being resolved, and taxpayers will feel the pain.
In spite of Illinoisans’ wishes, lawmakers imposed a 32 percent income tax hike. Nearly 80 percent of Illinoisans wanted lawmakers to enact reforms before tax hikes.
Here’s how the budget fails Illinoisans:
- The budget hikes income taxes by 32 percentIllinoisans are already struggling under the nation’s highest property taxes, a struggling economy and a poor job market.
They cannot afford another drain on their wallets. Yet the new budget includes the largest permanent income tax hike in Illinois’ history. Personal and corporate income taxes will rise by about $5 billion annually, starting July 1, 2017.
The personal income tax rate rose 32 percent to 4.95 percent from the previous 3.75 percent rate.
The corporate income tax rate rose 33 percent to 7 percent from the previous 5.25 percent rate.On average, Illinois households will be burdened with $1,000 in additional taxes annually.
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- It doesn’t contain any structural reforms The lawmakers’ budget plan has $5 billion in taxes because it fails to enact any of the structural spending reforms Illinois needs.
Instead, it resorts to spending reductions that cut department operations, fund transfers and other gimmicks. None of those things are long-term solutions to Illinois’ unbalanced finances.
Real, structural reforms are needed on items such as local property taxes, workers’ compensation, Medicaid, pensions and higher education to ensure government costs grow slower. The budget has none of those reforms.
- It does nothing to solve Illinois’ pension crisisThe budget assumes about $900 million in pension savings by introducing an optional hybrid pension/ 401(k) plan for new workers, smoothing changes in actuarial assumptions over time and shifting the cost of high-salary employees’ pensions to local governments, among other items.
These small reforms may help Illinois’ finances in the short term, but they’ll do nothing to actually solve the state’s pension crisis. Keeping pensions alive through hybrid plans will prevent Illinois from ever having stable finances. Pension costs are too inherently unpredictable and unmanageable.
Only by moving away from pensions and giving new workers standalone 401(k)-style plans can lawmakers begin an end to the pension crisis.
- Despite cuts, it contains lots of porkProponents made a big deal out of the cuts included in the budget. But they failed to mention the millions in pork spending it also contains.
For example, the budget gives $10 million for the construction of a city center campus at Joliet Junior College in Democratic state Rep. Lawrence Walsh’s district.
It grants $285,000 to an urban fishing program run by the Chicago Park District. Lewis and Clark Community College in Democratic state Rep. Dan Beiser’s district gets $875,000 for greenhouse renovations.
And it grants nearly $5 million for remodeling, electrical work and renovation and an expansion of a fine arts center at Eastern Illinois University in Republican state Sen. Dale Righter’s district.
Righter was the only Republican to vote in in favor of the budget in the Senate.
- It sets up Illinois for another unbalanced budget in 3 yearsIllinois’ budget will still end up underwater in just a few years, even with $5 billion in tax hikes.
Even if all the 2018 budget’s assumed savings are successfully implemented, the state will be back to deficit spending again by 2021 based on conservative projections of the state’s revenues and expenditures.*
Pension costs could rise due to new actuarial assumptions or a downturn in the stock market. Department spending on core government services could eat into planned budget balances. Tax revenues could fall as more people leave to avoid paying the 32 percent income tax hike.
Deficits will occur because the budget doesn’t fix the state’s true problem: out-of-control government spending.
- It might not save Illinois from a junk ratingLawmakers thought that by passing any budget – even one without reforms – they could keep the state from the disgrace of a junk rating.
But Moody’s Investors Service has said it may still downgrade the state to junk precisely because the budget contains none of the pension or spending reforms Illinois needs.
The agency warned that the budget “lack[s] concrete measures that will materially improve … its unfunded pension liabilities” and that the plan has “substantial implementation risk,” in part because it lacks “broad bipartisan support.”
It will come as no surprise to bondholders and investors if Moody’s ends up downgrading Illinois to junk.
In fact, a junk rating will reflect reality. Illinois bonds have been trading at junk levels ever since the state was ordered to properly fund its Medicaid obligations last month.
Illinois is in trouble
Illinois is broke. Illinoisans are tapped out. The economy is broken. Yet politicians’ only solution to the current crisis is a multibillion-dollar tax hike on Illinoisans.
Instead of more taxes and more spending, state lawmakers should have passed a balanced budget that actually solves the state’s structural problems without resorting to tax hikes.
But they didn’t. They perpetuated the status quo on the backs of Illinoisans.
Illinois lawmakers should remember that Illinoisans are all voluntarily living here. Residents are free to leave to seek out better opportunities in states that impose a far smaller burden on their taxpayers.
Illinoisans have already been leaving, in droves. This latest all-tax, no-reform budget will only accelerate that exodus.
*The Illinois Policy Institute assumes both revenues and expenditures will grow 2 percent annually. If the presumed savings ($1.1 billion of pension savings and $814 million of “unspent appropriations”), revenues or additional expenditures (up to $700 million in additional annual debt service to pay down the backlog of bills) are off in any way, the state could be deficit-spending as soon as fiscal year 2019.