Articles

Striking A Budget Balance Will Call For Cuts, Tax Hikes

Monday, March 11, 2002
by Marc J. Lane

Reprint permission from the March 11, 2002 issue of Crain's Chicago Business.

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All the candidates for Illinois governor claim they're eager to close the state's growing revenue gap. But, so far, not one of them has been willing to concede that tax increases or new taxes may be unavoidable.

So, there is lots of talk about wringing waste and inefficiency out of government, about reclaiming more than $1.5 billion in "member initiative" money that state legislators get to spend on their pet projects and about recouping the state's fair share of federal funds.

But none of this is likely to be enough.

The state's budget is woefully out of balance. The recession has taken its toll, and big-ticket items, including insurance and Medicaid costs, have increased much faster than had been predicted.

Comptroller Daniel Hynes reports that the state's general revenue fund was $655 million in the red on Dec. 31. And that's after Mr. Hynes withdrew $226 million from the rainy day fund, every nickel it had.

The next budget year, starting July 1, looks even bleaker. Hundreds of millions in unpaid bills will be left over. Payroll costs are surging. And, according to the Illinois Pension Law Commission, the state's pension funds have suffered billions in paper losses in the stock market over the past year, which will require the treasury to kick in $55.6 million on top of the $148 million already budgeted for workers' pensions in the fiscal 2003 projections.

Gov. George Ryan refuses to call for a tax increase in a high-stakes election year. Instead, he has opted to slash the state's payroll by 3,800 jobs, to close a center for the mentally ill and two state prisons and to reduce state services. Gov. Ryan's new budget calls for across-the-board spending cuts of 3%, after stopgap cuts last fall of 2%.

But the governor hints that he would be open to signing a tax bill if legislative leaders were to introduce one. And the truth is that some tax initiatives are easy to justify and ought to be seriously considered.

Hiking the tax on cigarettes, for instance, is a no-brainer. But only U.S. Rep. Rod Blagojevich would increase the tax on cigarettes. He would earmark the proceeds to create a purchasing pool to lower drug prices for seniors who don't qualify for the cicuit breaker program. That's a worthwhile mission in its own right, but it won't do anything to stop the budget from hemorrhaging.

The Illinois Coalition Against Tobacco figures that raising the state's tax from 58 cents to $1 a pack would raise $318 million in annual revenue.

Then there's the tax on casinos. Illinois' nine riverboat casinos took in $1.6 billion in fiscal 2000. Given the social costs of gambling and the huge profits casino operators realize, it seems reasonable to consider increasing the marginal tax on gaming by five percentage points, as the Center for Tax and Budget Accountability has proposed.

Paul Vallas, alone among the gubernatorial candidates, would raise the tax rate on casinos, but over time, his plan would redeploy the proceeds to the counties and municipalities for public safety purposes. The state's Economic and Fiscal Commission estimates that a five-percentage-point hike would bring an additional $90 million into the state's coffers each year, and that's really where it ought to stay.

A third tax worth revisiting is the estate tax. Last spring, Congress repealed the federal estate tax, gradually, by 2010. But few took notice of the fact that the Illinois estate tax is tied to the federal estate tax, and as the federal tax is reduced to zero, the Illinois tax will be as well.

Illinois stands to lose about $100 million in revenue next year, and once the repeal is fully phased in, about $450 million annually. To keep the tax in effect, all the General Assembly would need to do is decouple the Illinois tax from the federal tax and turn the calendar back to the way things were on Dec. 31, 2000.

Whether repealing the Illinois estate tax; and benefiting about 2,500 of the state's wealthiest families each year; is good public policy or not, it's never been debated in the State Legislature. Illinois faces an unprecedented economic crisis, and the gubernatorial candidates can demonstrate their leadership by inviting a vigorous debate now.

Marc J. Lane is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law. He can be reached at [email protected]

 


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Copyright © 2002 by Crain Communications Inc.

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