Issue: Ensuring a sufficient and stable revenue base for Illinois to meet its commitments
My Position: I support enacting a graduated, progressive income tax, which would require a constitutional amendment; eliminating certain corporate tax loopholes; and expanding sales taxes on certain goods and services, including legalized marijuana sales to adults.
Why: To raise sufficient revenue for the state to meet its financial commitments without further burdening working and middle-class families and to reduce property taxes.
One of the questions I'm most often asked going door-to-door is, "How do we fix the state's chronic budget deficit?"
Before deciding to run, I thought long and hard about this question. Last spring, when the legislative session was winding down I joined the March to Springfield sponsored by Fair Economy Illinois, a statewide alliance of community organizations. On May 30, we were one day from the end of the regular session of the General Assembly with no budget agreement in sight after nearly two years. Even a few weeks without authority to spend funds for the basic functions of state government creates havoc and is unacceptable. Two years was intolerable. Unpaid bills to service providers and other vendors were mounting by the hour.
What was clear last spring is still true today: Illinois needs to collect enough taxes to meet its commitments to its residents and vendors without overburdening the working and middle class families who make up the vast majority of the population.
Illinois was already in a precarious financial position when the Great Recession in 2008 further diminished tax revenues and increased the need for medical, social and support services for tens of thousands who lost jobs and relied on state assistance for survival. In a rare bipartisan effort, Governor Quinn and the General Assembly agreed, reluctantly, to several measures to reduce spending and raise taxes. The state workforce diminished significantly, pension commitments for all new state employees were significantly reduced, state-supported programs were scaled back and the income tax was increased from 3 to 5 percent. With the economy slowly recovering in 2014, the state was reducing the backlog of bills and meeting its other obligations. Then, the newly elected governor demanded that the income tax increase be allowed to expire, reverting to 3.75 percent.
Despite the lack of appropriation authority, state employees and Medicaid clients seeking essential medical care sought and won court orders requiring the state to continue paying these obligations. The state also continued meeting its debt service and pension payments. And the legislature and governor agreed to continue payments to public schools. The drastic loss of tax revenue from the lower income tax, along with continued spending for the largest of state expense categories, resulted in unpaid bills of an unprecedented $16 billion in summer 2017. By July, with state universities and the human service provider safety net on the brink of collapse from nearly two years without state payments, the General Assembly, with bipartisan votes, reinstated the income tax increase to 4.95 percent, and passed appropriation bills to authorize payments for state government functions over Governor Rauner’s veto.
Rationale for a Graduated Income Tax
I came to the conclusion that Illinois has a revenue crisis from several directions. First, significant cuts in state spending and staffing have already occurred. And we need our state agencies now, more than ever, to protect us from the destructive policies of the Trump administration, especially in the areas of pollution, health care and social services. Second, despite rhetoric to the contrary, Illinois' income taxes are modest. Even at the new rate of 4.95 percent, Illinois ranks towards the low end, compared with neighboring states. Minnesota, Iowa, Wisconsin, Missouri, Arkansas and Kentucky have income tax rates higher than Illinois, as do New York, California and Massachusetts.
Illinois does stand out in one respect. Of the 40 states with income taxes, Illinois is one of only eight states that apply the same tax rate to all state taxpayers, regardless of income.
The flat tax rate means that any increase hits the working and middle-class taxpayers hardest. State income taxes take a much bigger bite out of the discretionary income for the vast majority of Illinois residents than for those with the highest income. For decades, when additional revenue was needed to meet commitments, rather than raise taxes on everyone, the governor and General Assembly often chose to delay large payments into the next fiscal year or borrowed to meet operational needs.
For the states with graduated income taxes, revenue increases can be targeted to those most able to afford the tax increase: those with the most money. Like our federal income taxes, under a graduated income tax, the tax rate on higher income brackets is greater than on lower income brackets.
The concept of a progressive income tax structured to reduce the tax rate for working and middle-class families, while increasing it for upper middle class and more wealthy Illinoisans is not new. It was recommended by the Center for Tax and Budget Accountability in 2010. And Rep. Lou Lang of Skokie, sponsored a bill to enact it in 2014, which needs to be reworked now that rates increased in July. I strongly favor enactment of a progressive income tax.
The drafters of our state's Constitution in the late 1960s memorialized the state’s flat rate income tax, which had only recently become law. Moving to a more progressive, graduated income tax requires an amendment to the Constitution, which I also support.
Another contributor to Illinois' chronic fiscal deficits is the very narrow range of goods and services subject to sales and use taxes. While the economy has shifted from goods to services, Illinois' sales tax has remained focused on the sale of goods and has failed to keep up with growth in the service sector. Many of us used to purchase nail polish, vacuums and lawn mowers, on which we paid sales tax. Those functions have shifted to a significant extent to service providers, to which no taxes apply. I favor expanding sales taxes to cover certain services to recognize the transformation of our economy. I also recognize the challenge of imposing taxes on new businesses and will work with all stakeholders to ensure new taxes are fair and reasonable, as they are in other states.
Financial Transactions Tax
I would also vigorously work for the adoption of a Financial Transactions Tax. Chicago is home to some of the nation's leading trading exchanges where billions of dollars in transactions are conducted daily. The FTT would be a very small tax on buying and selling of financial assets such as stocks, bonds, currencies and derivatives (futures and options) based on these assets. Each year the value of products traded on Chicago exchanges totals more than $900 trillion. A very, very small tax, in the order of .00002 per dollar value of the transaction could raise $10 billion to $12 billion per year in new revenue. A bill for such a tax has been introduced in the General Assembly and I would work hard to see it enacted. Some of the largest financial markets in the world operate in jurisdictions with financial transactions taxes that have been in place for decades.
Part of Illinois' revenue crisis results from shortfalls from corporate income taxes. Despite a corporate income tax rate that increased from 5.25 to 7 percent this summer, analyses conducted during the budget impasse revealed that approximately two-thirds of the largest corporations pay no corporate income tax. Illinois' corporate tax law allows businesses to claim a variety of deductions and credits. Further, large multi-state or multi-national corporations have additional options to account for their business, revenue, payroll and other costs in ways that minimize their Illinois income tax. Some loopholes were once intended to attract businesses, others were created by clever interpretations of tax law by attorneys and accountants. Regardless, they are used now to avoid paying anything near the legislated corporate tax rate. Although this is an extremely complex subject, the General Assembly needs to identify those loopholes that are costing the state dearly in lost revenue and close them. Supporters of a bill pending in the General Assembly estimate that the state can regain approximately $1 billion in revenue by closing the most egregious loopholes.
Businesses are permitted to retain 1.75 percent of state sales taxes to compensate for their collection efforts. This represents another hole in the state's revenue bucket. While this might have been reasonable when it was established in the 1930s, modern, automated accounting and reporting programs can account for and submit sales tax collections at a small fraction of the tax dollars now lost to the state.
Finally, an enormous challenge pursuing corporate compliance with tax laws is the lack of any requirement for public disclosure of their income tax payments. There is a requirement on publicly traded corporations for federal tax returns, but not for Illinois. Simply sharing how much taxes they each pay would be a reasonable first step in helping Illinois regain its financial footing from increased corporate tax collections. There is legislation that would require public disclosure of corporate Illinois income tax payments, which I support.
Closing these loopholes and others would provide $1 billion in additional funds for vital services in Illinois. Increasing the corporate tax rate and enacting a corporate tax disclosure law will also ensure that large corporations are paying their fair share.
Other Revenue Sources
The other potential revenues I would tap into to balance the state's structural deficit include a coal extraction tax. Illinois is one of only three of the nation's 25 coal-producing states that doesn't have a "severance tax" requiring companies to pay a small portion of their profits to the state or local counties. With coal production in Illinois increasing in recent years, extraction tax revenue could contribute up to $200 million per year. This new revenue is sorely needed to support additional funding for job retraining and economic development in central and southern Illinois, where the loss of mining jobs has devastated the local economy.
This tax is strongly supported by the Sierra Club and other environmentalists for its contribution to helping Illinois achieve its climate change goal of 100 percent clean and renewable energy. Because such a small amount of the coal mined in Illinois is used for local electricity generation, the extraction tax would not raise electricity rates.
Illinois also has suffered from the shift from purchasing goods from stores in the state, where customers pay sales tax, to purchases on the Internet, where often they don’t pay taxes. This is improving as some Internet merchants voluntarily collect sales tax or establish a physical presence in Illinois. Purchases from Internet merchants were exempted from sales taxes in the 1980s to encourage e-commerce. There is no longer any justification for their special treatment and I would work at the state and with our Congressional delegation to ensure all Internet purchases are taxed the same as comparable goods sold in stores in Illinois.
Lastly, I would support legalizing and taxing sales of marijuana (cannabis) to adults as a criminal justice reform measure and as a source of additional revenue for the state. Bills currently under consideration that would legalize and tax sales of cannabis to adults are estimated to generate $500 million in revenue once implemented. There is obviously a strong and permanent market for marijuana with consumers willing to pay substantial taxes, judging from the experience of other states that have legalized and taxed its sales. I would work to include it in a revenue-generating package of measures to stabilize the state's budget.
Property Tax Relief
Stabilizing state revenue would offer needed relief from the extraordinary burden of property taxes. The complaints I hear about high taxes, when examined more closely, really focus on the property tax, more than the state income tax. But they are inextricably linked. Shortfalls at the state have left Illinois government with inadequate revenue to meet its obligation to fund the majority of public school costs, as the Constitution requires, which, in turn, has left communities turning to their local property taxes to pay for the desired level of education. While property tax increases have been pursued vigorously throughout this legislative district, such as the recent referendum in Evanston/Skokie District 65, many districts in Illinois do not have the local tax base for property tax increases. As a result, their schools suffer, leading to stark disparities in educational achievement, which is associated with lower long-term earning potential for their children. Illinois meeting its obligation to fund public schools is a much better alternative than an arbitrary property tax freeze, which I oppose.
The positive impact of a stable revenue base for Illinois cannot be overstated. It would have beneficial consequences for everyone, from children in state-supported early childhood programs, to very low-income families seeking medical care so their kids can go to school, to high school students considering Illinois' public universities and community colleges, to people with disabilities and frail older adults dependent on state-supported caregivers. With a stable revenue base, Illinois would be able to meet its commitments and obligations to its residents, providers, merchants and bond-holders. It's absolutely essential to stabilize our finances so we can stabilize our population. The road we are on sends our teens and young adults out of state for college. The route we need to take would keep our children in the state for college and career training at adequately funded community and four-year colleges and universities, after which they would find well-paying permanent jobs, build their careers, and raise their families here.
While it is difficult to impose and collect new taxes, it is incumbent upon the General Assembly and governor to bring all interested stakeholders together and reach compromises necessary to restore Illinois to sound financial footing. Illinois' strengths are many. But the long term financial viability of the state is at-risk if our long-term revenue base is not addressed. I am very eager to help establish the spirit of good will necessary to negotiate with businesses and service providers to determine how best to help Illinois achieve economic sustainability.
Although this Issue is focused on raising sufficient revenue for the state to fulfill its commitments, we must, of course, look for every possible way to continue to reduce unnecessary state spending and apply our best technological and innovative minds to increase our state's efficiency. As your state representative, I will welcome your thoughtful recommendations to improve the state’s efficiency and effectiveness.
I look forward to serving in the General Assembly from the 17th District so I can apply my experience, problem-solving skills and progressive values to help Illinois secure a sound revenue base, essential for the state to meet its commitments and create opportunities for economic growth and a thriving society.