Funding Health Care For All and Important State Services
The Illinois Debate Over the Right Mix of Revenues
A highly public dispute over tax policy is dominating the political landscape in Illinois this year. Governor Rod Blagojevich has proposed a budget that would accomplish four important and longstanding public policy aims. The budget would dramatically increase and alter the basis for funding public education, ending decades of shameful imbalance and relieving pressure on the property tax. Second, it would also rescue the state's desperately underfunded and constitutionally mandated pension programs for state employees and teachers. Third, it would resolve the state's chronic "structural deficit" by creating revenues responsive to the economy and reducing large costs (like the pension fund catch-up payments) that have consumed most of any revenue growth under the current system. Finally, the budget would establish a program, called Illinois Covered, which would offer affordable decent health coverage to everyone in Illinois.
These four issues have festered for so long in Illinois that there is relatively broad consensus that all of them need to be addressed. Each issue independently is an acknowledged crisis. This is one of those rare times when a consensus exists that substantial new revenues are needed. In the first legislative session after an election, the timing is also right (conventional wisdom holding that tax increases done right after an election stand the best chance of being forgotten by the time the next election rolls around). The challenge, of course, is to identify and approve of the specific revenue measures in a climate where any proposed change in the existing revenue scheme is immediately tagged as having "winners and losers" by the interest groups. The reality is that all Illinoisans are losing under the current tax structure.
The centerpiece of Governor Blagojevich's proposed revenue reforms, which would provide the bulk of the money needed to fund the four reforms listed above, is a new gross receipts tax, or GRT. The GRT would replace the corporate income tax and would tax all business revenue, regardless of profitability. It taxes this broad base at a modest rate, generating substantial revenues overall, but having minimal impact on particular business transactions. Governor Blagojevich's proposal would tax transactions involving goods at 1% and services at 2%. He would exempt non-profit organizations, retail food and drug transactions, most businesses with revenues under $5 million (over 90% of all businesses in the state), goods sold for export to other states or countries (50% of all goods manufactured in Illinois), and other transactions. The proposal would generate $7.5 billion and fund all of the priorities in the budget.
The Governor justifies replacing the corporate income tax with the GRT on the grounds that the corporate income tax is so riddled with loopholes that many large corporations are now avoiding paying any tax at all, or are making only nominal payments. He points out that last year, 37 Fortune 100 companies with average sales of $1.2 billion in Illinois paid no corporate income tax, that 12,500 of the largest corporations doing business in Illinois paid an average of $151 in corporate income taxes, and that overall receipts from the corporate share of the income tax have fallen from 21 to 12 per cent of total income tax receipts.
Opposition to the Governor’s Funding Proposal
The opposition to the GRT from the business community has been swift and fierce. Interestingly, the opposition has focused on the tax proposal and not the spending priorities. This is telling. Education, healthcare, the pension crisis, and the antiquated and inadequate Illinois revenue system are all spending imperatives that are supported broadly and that deeply fracture the business community. There is much business support, although in varying configurations, for new funds for each of these priorities. The opposition therefore has focused on one factor: the GRT, a new business tax, not the programs.
The Illinois Chamber of Commerce, the Illinois Manufacturer’s Association and the rest of the mainstream business community has united in opposition to the Governor’s GRT plan, contending that it will put Illinois at a competitive disadvantage that will cause businesses to layoff workers, move out of state, or close. Business sounded the same false alarms when Governor Ogilvie proposed a state income tax decades ago and just last year when Illinois raised the minimum wage. Indeed, the same arguments were used to oppose the 8-hour day and the prohibition of child labor. Illinois has a world-class trillion-dollar market that businesses do not exit on emotional grounds. It is interesting that in contrast to the mainstream business community, the Black Chamber of Commerce supports the GRT proposal since most of their members would be exempt from it and they recognize the need to address the skyrocketing cost of health care and our broken education funding system.
On the other hand, as with any tax, there are credible arguments against the GRT. The rates proposed by the Governor are higher than the GRT rates in other states that have such a tax. Therefore, there is a higher possibility that some or all of the tax will be passed on to consumers, which creates a "regressive" impact. The taxation of every business transaction creates an accumulation of taxable events as an item proceeds through the business process to its eventual market. These and other arguments must be reckoned with in assessing the Governor's proposal.
It is important, though, that the perfect not become the enemy of the good. All tax increases are imperfect, creating unfairness and avoidant behavior on the margins. Economists since Adam Smith have preferred broad-based, low-rate taxes like the GRT because they minimize disruption to the economy, unfairness and avoidant behavior.
Moreover, some elements of the business community, led by the Civic Committee of the Commercial Club of Chicago, recognizing the need for substantial new revenues and reform of the revenue system, and recognizing the strong spending needs, proposed a package of new taxes before the Governor proposed the GRT, and not including the GRT. The package features an increase in the income tax and expansion of the sales tax to cover consumer services. This proposal is in substantial harmony with a package proposed by education and revenue reform advocates, led by the A+ Illinois Coalition, now contained in Senate Bill 750. The main difference is that the reformers' proposal includes a property tax reduction (a "swap") and the business version does not. The opposition of these groups to the GRT proposal is formidable, because they bring other revenues to the discussion.
The main flaw in these alternative proposals in their current form is that they do not support the enactment and funding of a program to provide affordable health coverage for all. These proposals also do nothing to combat the corporate tax avoidance that the Governor has highlighted and they raise fairness issues by extending the sales tax to cover consumer services like haircuts that everyone uses but not professional services like attorneys and accountants that the well-to-do are more likely to use. The Governor also has pledged not to raise income or sales taxes, believing that they tax individuals while corporations escape paying their fair share. It is in this context that he has called the GRT proposal his "tax fairness" plan.
For more information on Illinois Covered, visit us on the web here, or respond to this article directly by emailing John Bouman.
A highly public dispute over tax policy is dominating the political landscape in Illinois this year. Governor Rod Blagojevich has proposed a budget that would accomplish four important and longstanding public policy aims. The budget would dramatically increase and alter the basis for funding public education, ending decades of shameful imbalance and relieving pressure on the property tax. Second, it would also rescue the state's desperately underfunded and constitutionally mandated pension programs for state employees and teachers. Third, it would resolve the state's chronic "structural deficit" by creating revenues responsive to the economy and reducing large costs (like the pension fund catch-up payments) that have consumed most of any revenue growth under the current system. Finally, the budget would establish a program, called Illinois Covered, which would offer affordable decent health coverage to everyone in Illinois.
These four issues have festered for so long in Illinois that there is relatively broad consensus that all of them need to be addressed. Each issue independently is an acknowledged crisis. This is one of those rare times when a consensus exists that substantial new revenues are needed. In the first legislative session after an election, the timing is also right (conventional wisdom holding that tax increases done right after an election stand the best chance of being forgotten by the time the next election rolls around). The challenge, of course, is to identify and approve of the specific revenue measures in a climate where any proposed change in the existing revenue scheme is immediately tagged as having "winners and losers" by the interest groups. The reality is that all Illinoisans are losing under the current tax structure.
The centerpiece of Governor Blagojevich's proposed revenue reforms, which would provide the bulk of the money needed to fund the four reforms listed above, is a new gross receipts tax, or GRT. The GRT would replace the corporate income tax and would tax all business revenue, regardless of profitability. It taxes this broad base at a modest rate, generating substantial revenues overall, but having minimal impact on particular business transactions. Governor Blagojevich's proposal would tax transactions involving goods at 1% and services at 2%. He would exempt non-profit organizations, retail food and drug transactions, most businesses with revenues under $5 million (over 90% of all businesses in the state), goods sold for export to other states or countries (50% of all goods manufactured in Illinois), and other transactions. The proposal would generate $7.5 billion and fund all of the priorities in the budget.
The Governor justifies replacing the corporate income tax with the GRT on the grounds that the corporate income tax is so riddled with loopholes that many large corporations are now avoiding paying any tax at all, or are making only nominal payments. He points out that last year, 37 Fortune 100 companies with average sales of $1.2 billion in Illinois paid no corporate income tax, that 12,500 of the largest corporations doing business in Illinois paid an average of $151 in corporate income taxes, and that overall receipts from the corporate share of the income tax have fallen from 21 to 12 per cent of total income tax receipts.
Opposition to the Governor’s Funding Proposal
The opposition to the GRT from the business community has been swift and fierce. Interestingly, the opposition has focused on the tax proposal and not the spending priorities. This is telling. Education, healthcare, the pension crisis, and the antiquated and inadequate Illinois revenue system are all spending imperatives that are supported broadly and that deeply fracture the business community. There is much business support, although in varying configurations, for new funds for each of these priorities. The opposition therefore has focused on one factor: the GRT, a new business tax, not the programs.
The Illinois Chamber of Commerce, the Illinois Manufacturer’s Association and the rest of the mainstream business community has united in opposition to the Governor’s GRT plan, contending that it will put Illinois at a competitive disadvantage that will cause businesses to layoff workers, move out of state, or close. Business sounded the same false alarms when Governor Ogilvie proposed a state income tax decades ago and just last year when Illinois raised the minimum wage. Indeed, the same arguments were used to oppose the 8-hour day and the prohibition of child labor. Illinois has a world-class trillion-dollar market that businesses do not exit on emotional grounds. It is interesting that in contrast to the mainstream business community, the Black Chamber of Commerce supports the GRT proposal since most of their members would be exempt from it and they recognize the need to address the skyrocketing cost of health care and our broken education funding system.
On the other hand, as with any tax, there are credible arguments against the GRT. The rates proposed by the Governor are higher than the GRT rates in other states that have such a tax. Therefore, there is a higher possibility that some or all of the tax will be passed on to consumers, which creates a "regressive" impact. The taxation of every business transaction creates an accumulation of taxable events as an item proceeds through the business process to its eventual market. These and other arguments must be reckoned with in assessing the Governor's proposal.
It is important, though, that the perfect not become the enemy of the good. All tax increases are imperfect, creating unfairness and avoidant behavior on the margins. Economists since Adam Smith have preferred broad-based, low-rate taxes like the GRT because they minimize disruption to the economy, unfairness and avoidant behavior.
Moreover, some elements of the business community, led by the Civic Committee of the Commercial Club of Chicago, recognizing the need for substantial new revenues and reform of the revenue system, and recognizing the strong spending needs, proposed a package of new taxes before the Governor proposed the GRT, and not including the GRT. The package features an increase in the income tax and expansion of the sales tax to cover consumer services. This proposal is in substantial harmony with a package proposed by education and revenue reform advocates, led by the A+ Illinois Coalition, now contained in Senate Bill 750. The main difference is that the reformers' proposal includes a property tax reduction (a "swap") and the business version does not. The opposition of these groups to the GRT proposal is formidable, because they bring other revenues to the discussion.
The main flaw in these alternative proposals in their current form is that they do not support the enactment and funding of a program to provide affordable health coverage for all. These proposals also do nothing to combat the corporate tax avoidance that the Governor has highlighted and they raise fairness issues by extending the sales tax to cover consumer services like haircuts that everyone uses but not professional services like attorneys and accountants that the well-to-do are more likely to use. The Governor also has pledged not to raise income or sales taxes, believing that they tax individuals while corporations escape paying their fair share. It is in this context that he has called the GRT proposal his "tax fairness" plan.
For more information on Illinois Covered, visit us on the web here, or respond to this article directly by emailing John Bouman.
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