Moving Beyond Denial on a Tax Increase

he state of the Illinois budget continues to be at the first stage of grief, denial. What we are denying is that some form of tax increase is inevitable.

What Illinois has, and would have no matter who is governor, is this: (1) a structural deficit, because our current tax structure just doesn't generate enough to fund the total state budgets and pension obligations at the rate we spend; (2) years of avoiding this through creative accounting such as fund sweeps and, in effect, using the pension funds as a credit card; (3) an overall tax system that is regressive, arguably one of the more regressive in the nation; and (4) a huge current revenue shortfall due to the recessionary economy, which has dramatically lowered revenues from income taxes, from sales taxes, and from the transfer of real estate. This revenue plunge is what tipped the deeply troubling into the truly alarming.

The unenviable task of proposing a tax increase to address chronic "dine and dash" fiscal policy compounded by current shortfall fell into Pat Quinn's lap immediately upon taking office. Those who would prefer some other governor have had a field day blasting first "Quinn's tax increase" and then "Quinn's budget cuts." But the math is the math and the facts are the facts. If anyone else was governor, in order to balance the budget they would be proposing a tax increase, or budget cuts, or both. So would any Republican governor.

The governor does not pass a budget. The governor sets the playing field by proposing a budget. You can fault what you don't like in Quinn's proposal, and many have, but at least he pushed out the paper he needed to push out. That was back in March.

It's then up to the legislature to pass a budget, and send it to the governor. The legislature this spring session failed to do that and left with a full budget still mired in the House Rules Committee. All that was sent to Quinn was a half-measure.

Faced with that, Quinn had two choices: continue to spend at the current rate, on the wish and hope that new money will magically appear somewhere down the line, or begin draconian cuts. The first option, as Senate president John Cullerton said in mid-June, would have been "incredibly irresponsible."

That led to the prospect of slashes to the operating budget that most agreed would be devastating to service providers, especially in areas that serve the most vulnerable of our population. Predictably, and justifiably, howls and protests began to arise; hundreds gathered at the Thompson Center on June 17 and thousands gathered two days later at a June 19 rally.

The reality is this: Even the Civic Federation, which "rejected" the governor's tax-increase proposal, concedes that an income tax increase (from 3% to 4% in the individual rate, and adding 1.6% to the corporate rate), is necessary, even if all the cuts they argue for are made. Quinn proposed a 1.5% increase, from 3% to 4.5%. The Illinois Senate proposed a 2% increase, i.e., raising the rate to 5%, which is what the more Keynesian and state-employee-oriented groups, such as CTBA, propose.

So the playing field is defined. No responsible analysis has surfaced saying we can truly balance the Illinois budget, and begin to right the pension ship, just with responsible cuts; in fact, most analysts concede at least a 1% increase in the state income tax is required. Note, if Quinn had proposed it, that would be labeled a "25% tax increase."

Some of this is word games with numbers. Is a 1.5-point increase, from 3% to 4.5%, a "50% tax hike"? Well, in a sense yes, because 4.5 is 50% more than 3, but it's still only 1.5% of taxable income. Also, no one will see their taxes go up by that much, because of exemptions. If you have $50,000 in income and $5,000 worth of exemptions, your tax is 3% on only 45K, not on 50K. So the "3%" income tax is really not even 3% right now.

Once the legislature went into overtime, 3/5 were needed to pass a budget bill, meaning that it can't be done just with Democratic votes. That brings the Republicans to the table, and the cynical would say that that was done on purpose, so that the GOP can't just hang back and label the increase a "Democratic tax hike."

Since a tax increase is unpleasant but just plain necessary no matter how you slice it, the time has come to move beyond denial and toward acceptance. Responsible leadership has to agree with the governor and the Senate that some increase is necessary. The Republicans have to accept the unpleasant fact that they are going to have to share in this responsibility.

Even a balanced budget will leave longer-term issues unaddressed. Any combo of income tax rate increase and increasing exemptions will be an unsatisfying variation on a two-bracket theme. Two brackets is too crude and will gore someone's ox no matter what. A truly progressive income tax requires amending the Constitution; when will we see the courage for someone to take leadership on that?

There's a middle state of grief called bargaining, typically unsuccessful; here, there might need to be some compensation for the vote some must make. That compensation ought to be in the form of Democratic acceptance of some Republican demands for reform, rather than buckets of pork doled out to individual holdouts.

What each participant demands and offers on the way to the inevitable ought to be scrutinized, as it will be a critical test of whether legislators are working for the common good, or just being extraordinarily selfish.

Adapted from an essay originally posted on Gapers Block, June 17, 2009


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