The State of Illinois, like most states, has had long term structural deficits especially since the 2008 financial crisis/recession dramatically reduced economic growth and therefore, tax base from which to raise revenues. According to one Chicago Tribune report in March 2011, fully two out of three corporations doing business in the state of Illinois had no state income tax obligation for fiscal 2008! Furthermore, the same report noted that business registered as partnerships and S corporations for tax purposes are taxed by the state at an individual rate of 5%, raised from 3% temporarily until 2014. In 2008, only half of such businesses owed any state income tax and of those that paid the tax the average amount for the year was $2,339! No wonder the Illinois has deficit problems. Like much of the rest of the country, the rich don't pay taxes.
The State of Illinois currently has a roughly $6 billion budget deficit for this year. Taxes on Corporations were dropped from 9.5% to 7.75% this year. Also, in April of this year, Rauner unfroze $100 million in special tax incentives for corporations approved by former Governor Pat Quinn but not executed. These tax breaks for some of the largest corporations doing business in the State of Illinois, was in part paid for by $26 million in social service cuts for some of the state's neediest residents.
Tax rates on corporations and individuals were dropped by 25% this year ending the temporary tax hike put in place by Pat Quinn's administration in 2011 to cope with high deficits. According to Reboot Illinois, a state policy watchdog group, From FY 2014...through FY 2016 (the first full year under lower taxes), state income tax revenue will decline by 35 percent. Illinois Democrats, including House Speaker Michael Madigan want to raise the State income tax back up and enact a special tax on millionaires similar to the one enacted in California in 2012 to avoid billions in vital budget cuts and to begin to cope with the state's $111 billion in unfunded pension obligations.
One example of the especially regressive nature of taxes in the State of Illinois (most state and local flat taxes are by definition regressive) is the funding of what is called P-12 education. According to data from the Illinois Board of Education between FY'09 and FY'13, P-12 education funding has been cut more than $861 billion or more than 12% despite the consistent number of students in the public school systems at about two million. Average funding per pupil also dropped between FY '12 and FY '13 by nearly five percent. The US Department of Education ranked Illinois fiftieth in the nation for public school funding. The problem is that a disproportionate share of funding comes from local sources such as property and other regressive taxes that fall heaviest on the working poor and middle class with state monies funding only a small share of local education costs. The Illinois BOE fact sheet shows that in 2010 "...the Illinois state budget provided for just 28.4 percent of education expenditures across the state while local tax revenues made up 59.2 percent." The national averages are 43.5% from state budgets and 43.8% from local sources for public education funding. Such regressive funding schemes are not only socially unjust, but hamper local consumer spending thus slowing economic growth rates.
The $36.3 billion budget for FY'16 that passed the State Legislature was vetoed by Gov. Rauner due to its inclusion of nearly $4 billion in unfunded spending which Rauner declared "unconstitutional" according to the state constitution. Rauner is demanding that Illinois Democrats accept his "turnaround" proposals which is simply a tagline for a slew of budget cuts amounting to $300 this fiscal year alone mostly in the area of Medicaid (facing a proposed $106 million in cuts), higher education funding, social welfare programs and other social spending. There were also proposed cuts to public transportation of $160 million for the CTA, RTA and Pace bus and commuter train services. Thousands of jobs hang in the balance. The CTA system gives around 1.7 million rides daily within the city and to suburban Cook County. Cuts could mean layoffs, more traffic congestion and a slower local economy. Under Mayor Emanuel, the CTA wiped out a $308 budget deficit this year and undertook a $5 billion modernization program. Emanuel is a big supporter of mass transit for vital commuter service and as a prop to the overall economy.
Cuts to Medicaid reimbursement could cost the state nearly 13,000 jobs and nearly $1.8 million in economic activity according to a recent Illinois Hospital Association report. It is also the case that Rauner is planning to cut a total of over $634 million in aid to all Illinois municipalities for their annual budgets. This will come as a 50% cut in the share of state income tax revenues going to cities. Chicago Mayor Rahm Emanuel has criticized Rauner's cuts saying;
“Unfortunately, Gov. Rauner’s proposed budget takes a buzzsaw to critical public health programs, education funding and our police, fire and other first responders. At the same time, it spares the wealthiest Illinois residents from being a part of the solution...Chicago, as well as many other municipalities, depend on this funding for police and fire services. For Chicago alone, this means funding for almost 1,000 police officers, youth programs, youth jobs and other essential programs that keep our children safe. Cuts to mass transit also put local governments in a terrible bind . . . Reducing the [CTA’s] operating budget by $100 million will only put more strain on operations and could lead to higher costs for commuters — not only in fares, but wait times and convenience.”
There is no reason to reduce vital services and funding for the working poor, the middle class and those in dire need who depend on these programs as tax cuts for the wealthiest Illinois residents are being enacted. Those benefiting from the state income tax cuts at the start of this year were mostly the mostly the top one percent of Illinois households. According to the Center for Tax and Budget Accountability The tax cuts will cost the State of Illinois about $4.7 billion in annual recurring revenue from the general fund. This loss will reduce the ability of the state to fund vital services and stimulate the economy. Absent this revenue, Illinois should expect fewer jobs and slower economic growth over the long term.
Furthermore, the tax savings was distributed highly unequally. The bottom 60% of the Illinois income scale received just $479 million or only 13% of the total tax savings while the top 11% of tax payers received over 54% of the tax savings or over $2 billion dollars. Another one billion in annual corporate tax cuts go to the biggest, multinational corporations doing business in the State of Illinois, not small businesses which don't pay the corporate income tax. The largest corporations which get the biggest tax breaks represent less than nine percent of Illinois businesses while local small business will get only the reduction in personal income taxes. According to The People's Lobby, an public advocacy group which is campaigning to make the 7.75% corporate tax permanent in order to reduce the tax burden on the middle class in Illinois, "...only 9% of revenue comes from corporate income taxes, but 55% of Illinois revenue comes from personal income taxes and 26% comes from sales taxes we pay."
Large corporations doing business in Illinois have received over a billion in tax cuts for this year alone from Rauner both in from the statutory rate cut and special tax incentives proposed by former Governor Quinn but activated by Gov. Rauner. Low relative statutory rates on Corporations, special tax incentives and long standing tax breaks that make no sense that survive in the State of Illinois tax code are costing Illinois millions annually and will cost billions over time. For example, Illinois is one of twenty five states that allows a "domestic production deduction" that permits a corporation doing business in the State of Illinois to take a tax credit on their Illinois tax obligation for incurring expenses for expanding production elsewhere in the country. According to the Center for Budget and Policy Priorities, this cost the State of Illinois over 139 million in FY 2009 alone.
Another costly loophole/tax incentive is called the Single Sales Factor allowing corporations that do business both in and outside of Illinois to pay taxes based only on the share of total sales made in the state. Corporate tax liability for multistate corporations has traditionally been based on the share of the corporation's property, total payroll and sales within the state in question. This is then totaled and divided by three to determine what share of the company's total gross income the state is to tax. Under Single Sales Factor (SSF) calculations, the corporation doing business in the state computes its tax obligation only by the sales factor. If only ten percent of the firm's sales are in the state, then only ten percent of its total gross income is taxable by the state. According to Good Jobs First, the authors of this report, the tax provision which was slowly phased in between 1998 and 2001, cost the state of Illinois $63 million in tax revenue in FY2000 alone while about 60% of the total tax relief from this change in the state tax code went to the six largest corporations doing business in Illinois. In fact, since this tax provision was fully enacted in 2001, which was lobbied for by big manufacturers in Illinois on the promise of more high pay jobs in industry, Nearly 300,000 manufacturing jobs were lost in the State of Illinois (albeit much of it due to the crisis since 2008).
Aside from the fact that such SSF discriminates against outside business that only sell in the state but manufacture elsewhere, it has not encouraged job creation in states where the adoption of SSF was expected to do so. State tax rates are shown to be very low on the list of considerations for corporate plant location. Low taxes don't usually lead to greater investment from outside and in fact some of the lowest tax states are among the least economically developed. As former Bush Administration Treasury Secretary Paul O'Neill once said, “I never made an investment decision based on the tax code. . . [but] If you want to give me inducements for something I am going to do anyway, I will take it.”
Illinois has a lot of corporate welfare on the books that has been passed over the years costing the state more in tax revenue than it ever got back in economic growth. These tax breaks for the rich are very costly over time and don't pay for themselves even in the short term.
Illinois has a revenue problem as opposed to a spending problem. Before the crisis, state spending was typically below five percent of the states GDP. Illinois also doesn't tax consumer services, as do most states, even though currently services contribute about 72% to the state economy. The pension crisis, which resulted from years of state neglect to contribute rather than "excessive" benefit levels, is what creates the impression of a dire fiscal crisis which is really a mismanagement crisis for public employee pensions. There is also the issue of corruption. But Illinois tax rates are not above national averages and neither is state spending. There is a real failure to tax the rich in Illinois as there is elsewhere. when combined with the lasting effects of the recession/financial crisis that began eight years ago it is clear the source of the problem. Fiscal crisis will be a long term problem in Illinois and everywhere else until the rich start paying their fair share of taxes.