llinois Governor Bruce Rauner sent a strong message of fiscal restraint and reform to taxpayers and the legislature this week when he delivered his“turnaround budget proposal” for fiscal year 2016. In it he made clear his intention to relieve taxpayers from the state’s fiscal decline and move towards eliminating the current budget shortfall of $1.5 billion that was caused by the false notion that the 2011 temporary tax increase would be made permanent.
Former Governor Quinn and the legislature claimed that the temporary tax hike was necessary to pay for the budget shortfall, fix the pension mess and straighten out the economy. Of course, the tax hike failed in this regard and what is worse when they created the 2015 budget, they presumed that the “temporary tax increase” would become permanent. This was shortsighted to say the least, and most certainly a miscalculation of taxpayer sentiment going into the 2014 gubernatorial election.
According to Rauner’s office, “The 67 percent income tax increase resulted in taxpayers paying an additional $34.1 billion in taxes over the four years in which it was in effect. It did little to pay down overdue bills.” In addition, Rauner points out, “The Child Care Assistance Program is out of money and families are worried about how to care for their children. Court reporters will start missing payroll next month, threatening to grind our justice system to a halt. And our state prisons will start missing payroll in early April, making them unable to fulfill their most basic operations.”
According to a letter to the legislature from Tim Nuding, Director of the Governor’s Office of Management and Budget, morale of Illinoisans is at an all-time low with 25% believing that the state is the worst state to live in and only 28% saying that they trust their government, compared with 60% at the national level. And for good reason… the state has the largest unfunded pension liability in the U.S.. Its credit rating is the lowest in the country and it leads the nation with its $111 billion public pension system deficit, which adds $5.3 billion in debt costs to the budget for next year – on top of the normal annual payment required to pay retirees.
Quinn’s failed plan may have curried favors with special interests and certain constituencies, but it has made a mess of the state’s ability to meet its fiscal obligations.
Rauner’s plan is a lesson in fiscal discipline. It includes $500 million to pay down unpaid bill backlog and public employee pension and benefit reform to the tune of $3 billion in the first year.
But spending cuts alone will not get the Land of Lincoln back on solid footing. Rauner also calls for lowering income taxes to be more competitive with other states and freezing property taxes for two years. According to this Chicago- Tribune piece, last month Rauner has suggested expanding sales tax to additional professional services. Currently Illinois taxes 17 professional services while Wisconsin taxes 94 and Indiana taxes 24.
This proposed transition from taxing income to broadening the sales tax base is a big step in the right direction for Illinois. As my co-authors and I clearly and thoroughly point out in An Inquiry into the Nature and Causes of the Wealth of States, that rely on generating revenue from taxes other than those on income, overall, grow faster and perform much better than those who penalize work. And the following chart says all that one needs to know about that...
