what is the problem that causes all other problems?

© Center for Tax and Budget Accountability 2008

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CENTER FOR TAX AND BUDGET ACCOUNTABILITY70 E. Lake Street Suite 1700 Chicago, Illinois 60601 direct: 312.332.1049 Email: [email protected]

“Hot Legislative Topics”Illinois Association of School Board Officials

Wednesday, May 14, 2008; 2:30 pmPheasant Run Resort4051 E. Main Street

St. Charles, IL

Presented by:

Ralph MartireExecutive Director


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What is the problem that causes all other

problems?

????

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The state’s fiscal policy is the culprit:

•The bad attitude of the powers that be is merely icing on the cake

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Illinois State & Local Revenue• In 2005 (the most recent national

comparison available), state and local revenue came from the following sources:

PROPERTY TAX 38%SALES TAX 17%EXCISE TAX 17%INDIVIDUAL INCOME TAX 16.2%OTHER 7.4%CORPORATE INCOME TAX 4.4%

SOURCE: Federal Tax Administrators Data

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FIRST, A SNAPSHOT OF WHAT IS


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• This makes Illinois the 6th most reliant state on property tax revenue in the nation.

• Two of the states more reliant on property taxes than Illinois – Texas and New Hampshire – do not have income tax.

• Illinois is more reliant on property taxes than Florida, Nevada, Tennessee, Alaska, South Dakota, Washington and Wyoming – which also don’t have income taxes.

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WHY – EDUCATION

• Illinois ranks 49th out of 50 states in the portion of education funding covered by state – versus local – revenue

• Illinois is the most reliant state on property taxes to fund schools in the nation.

(National Education Association Data)

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FAIR PROGRESSIVE

RESPONSIVE TO MODERN ECONOMY

STABLE DURING POORECONOMIES

EFFICIENT DOESN’T DISTORTPRIVATE MARKETS

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WHAT SHOULD BE:

BUT ISN’T


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WHICH HAS CONSEQUENCES FOR ANNUAL REVENUE GROWTH

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HIllinois State Major Tax Revenues Have Not Kept Up With

Inflation by Over $7 Billion Since 2000

-$179.30

-$1,274.10

-$1,873.03-$1,953.03

-$1,369.20

-$576.40

$17

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

2001 2002 2003 2004 2005 2006 2007$

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Includes: Personal and Corporate Income, State Sales, and Public Utility Taxes. Source, Illinois Commission on Government Forecasting and Accountability. Inflation based on Bureau of Labor Statistics, CPI.

THERE ISN’T ANY


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1. PROJECTED FY2008 GENERAL FUND REVENUE Growth from State and Federal Sources:

$670 M

2. INFLATIONARY COST OF MAINTAINING FY2007 SERVICE LEVELS IN FY 2008

$907 M

3. SHORTFALL―without funding pension ramp, enhanced investment in schools, or adding or expanding any public services:

-$237 M!

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Category Dollar Amount

Forecasted FY 2008 Revenue Increase $670

Dollar Amount Necessary to Keep Up with the Inflation Costs of Continuing FY 2007 General Fund Service Levels -$907

Dollar Increase in the Required FY 2008 Pension Funding Payment over FY 2007

-$650

Dollar Amount of Unpaid Medicaid Bills in FY 2007 Carried Over to FY 2008

-$2,000

Dollar Amount of FY 2008 One-Time Revenues to be Used to Cover Spending on Public Services (Fund Sweeps and Charge Backs)

-$193

Total Estimated FY 2008 Deficit -$3,080

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*Adjusts solely for historic rates of inflation and population growth, and assumes normal economic growth.

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The Illinois Structural Deficit (How Revenue Growth Will Not Keep Pace With The Cost of Current Services)

20062007

20082009

20102011

20122013

20142015

20162017

20182019

20202021

20222023

20242025

2026

Revenue

Expenditures

$24 Billion

$49 Billion

$44 Billion

$39 Billion

$34 Billion

$29 Billion


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• Illinois has the 5th largest population (over 12 million) and economy (about $600 billion annually) in the nation, but

• Overall, Illinois’ total state AND local tax burden, as a percentage of personal income ranks only 45th in the nation.

• The second lowest tax burden in the Midwest to Missouri.– Illinois taxes 14.8% of income - Missouri

14.7%

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• But Illinois is high tax for low & middle income families

• Illinois also ranks only 42nd in spending among the states

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State & Local Tax Burden as a Percentage of Income

Income Range

Less than $16,000

$16,000 – $30,000

$30,000 – $48,000

$48,000 – $77,000

$77,000 – $148,000

$148,000 – $295,000

$295,000 or more

Average Income

$8,900 $22,600 $38,500 $61,100 $101,400 $203,600 $1,322,100

Tax Burden 12.7% 11% 10% 9.2% 7.7% 6.2% 4.6%

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-6%

5%

33.20%

50.20%

93.4%

-20%

0%

20%

40%

60%

80%

100%

Bottom 60% Next20%

Top20%

Top15%

Top1%

Income Growth in the United States 1979-1999(Real 1999 Dollars)

*Source U.S. Census Data

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Shares of U.S. Household Income by Quintiles (1980 & 2005)

Shares of Household Income by Quintiles - 2006


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Ignoring all that—here’s the 2008 lottery proposal summary

• Sell or lease 80 % of the Illinois Lottery for $10 billion

• Use $7 billion to fund a capital program, and float another $3.8 billion in capital bonds

• Use $3 billion to purchase an education funding annuity

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The Annuity Fund

• Create an annuity fund with the $3 billion balance

• Combined with the retained state interest, will generate $600 million in annual revenue stream to fund education over the next 25 years

• Intended to replace current Lottery $$$IL

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What’s Missing?

• Funding Equity/Property Tax Relief

• Higher Education

• Sustainability

• Growth

• Cliff

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And that’s a best case scenario

Just 2 years ago, full sale of lottery was to generate $10 billion

Starting point is $22 million less than 2007 lottery proceeds to CSF—over $622 million

Over the last 5 years, lottery revenue has grown by an average of $27 million per year

That’s $108 million in lost revenue over 4 years—& what happens when annuity goes?IL

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SB750 is designed to: Be sound tax policy for the modern, capitalist economy

Make tax burden fairer, by making it more progressive―the bottom 60% of income earners won’t pay more in taxes after SB750 passes

Improve school funding by Raising the foundation level Enhancing special education funding Targeting $300M in additional funds to struggling schools Investing $300M more per year in higher education

Eliminate the Unfunded Pension Liability Provide progressive property tax relief statewide, that

effectively helps struggling communities while reducing fixed costs for business

Keep Illinois’ status as a low tax state

SB

750

SB

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Required Yearly Pension Payments: FY 2006 - FY 2045

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

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After SB750:

Flat payments of $3.4 billion per year amortize the full unfunded liability

The ramp goes away, out year payments become easier

Normal cost handled by current revenue

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INCOME TAX INCREASE

3% 5%

3% 2% =5%

2/3 = 67%

*Note, corporate rate goes up from 4.8% to 8%, but―overall corporate tax burden goes down!

SB

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SB

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Goods and Service Sectors as a Percentage of the Total Illinois Economy

32%

26%

20% 19%15% 14% 13% 13% 13%

63%69%

78%82%

76% 76% 77% 76% 77%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1965 1975 1985 1995 2000 2001 2002 2003 2004

Goods Services

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Brings stability by taxing solely consumer services, like bowling, lawn care and health clubs

SB750- DOES NOT TAX healthcare, housing or business services

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SB

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SB

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Income Tax 3% 5% Same as4.8% 8% HB750

Property Tax Relief

$2.9 B – same as HB750

Targeted Tax Relief

$600 M - $900 M

Pension Ramp Funding

For 3-4 years

Capital Bill $25 B

No Sales Tax Reform, so no Elimination of Structural Deficit


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SB

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LGDF $700 M down to $200 M

Health Care Payments

$600 M to Medicaid

Residential Renters Credit

5% of rent

Secretary of State/Illinois State Police

$136.6 M (SOS – 22.3%; ISP 77.7%) to cover Road Fund Diversions

Tuition Tax Credit Jump

$500 - $1,000


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Lumber Company

Tax

Finishing Company

Tax

Furniture Manufacturer

Tax

Wholesaler Tax

Retailer

TAX

Consumer

Compare that to a Gross Receipts Tax

GRT's are regressive & inefficient


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Higher Education Appropriations Have Failed to Keep Pace With Inflation Since 2003

$64,583 $57,600

-$209,920

-$174,426

-$92,878-$92,722

-$2,285

-$229,063

$127,615

-$280,000

-$245,000

-$210,000

-$175,000

-$140,000

-$105,000

-$70,000

-$35,000

$0

$35,000

$70,000

$105,000

$140,000

$175,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Dolla

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Source: Illinois Commission on Government Forecasting and Accountability and Office of Budget and Management. Inflation based on Bureau of Labor Stats, CPI


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Has State Funding of Community Colleges Kept Up With Inflation?

-$68,550 -$67,329

-$74,945

-$87,142

-$92,500

-$86,379

2003 2004 2005 2006 2007 2008$ in

Thousands

NO NONONO

NO NO

Source: Illinois Commission on Government Forecasting and Accountability and Office of Budget and Management. Inflation based on Bureau of Labor Stats, CPI


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Current Basis for Foundation Level

• The Illinois state “Foundation Level” is the minimum per child guaranteed expenditure for K-12

• Does NOT include: poverty, special ed, transportation, etc.

• Currently $5,734 – but not tied to any measurable standard

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Education Funding Advisory Board

(“EFAB”)

• Change basis to a measurable outcome standard, predicated on costs and test results

• Foundation Level should be at least $7,191 (after adjusting for inflation)

• Total cost: $1.8 billion

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SPECIAL EDUCATION FUNDING

(Not so Special)

$8,000 was granted in 1985 per special ed instructor

Increased in FY 2008 to $9,000 per special ed instructor

Adjusting for inflation, in 2008 a school district would need either $15,844 (CPI) or $19,767 (ECI) just to stay evenS

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For Tax Fairness FAMILY TAX CREDIT

EXAMPLE:

Tax Credit of $500Income Tax Liability $200Balance $300

Taxpayer receives a $300 check for the balance, offsetting sales, excise and property taxes paid.

SUMMARY:

$900 million refundable credit targeted to middle, low and no income families

Designed to eliminate impact of tax enhancements under SB750 on middle/low income taxpayers

Net effect – through refundability feature, the credit effectively relieves both income and sales tax changes, so the bottom 60% of income earners do not pay more in taxes under SB750

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PROPERTY TAX RELIEFAMOUNT: $2.9 billion, statewideMETHOD: Abatement of 25% of the property taxes that

fund education Minimum guaranty of 20%, with extra relief to low income areas

TRANSPARENCY: Amount of abatement shown on individual property tax bills

Description River Forest Chicago HeightsTotal Bill $10,000 $ 6,000

School Levy $ 7,000 $ 4,000 Portion of School Levy ($1,400) ($1,200)already paid by the state 20% minimum 30%, after bonus relief

Net Paid by Property Tax Payor $8,600 $4,800

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CONTINUING APPROPRIATION

A + B + C

FY BR $1.8 billion ECIFoundation Level CPI

$2.9 billion Property Tax

Special Education Mandate, Bonus Investment Pool

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HB750, Senate Amendments 1 and 2HB750, Senate Amendments 1 and 220042004--2005 General State Aid Increase and Property Tax 2005 General State Aid Increase and Property Tax

Relief by RegionRelief by Region

Chicago

$427,067,725 GSA

$351,398,947 Relief

Other Cook

$239,461,893 GSA

$608,320,599 Relief

Collar

$404,514,547 GSA

$721,335,066 Relief

Downstate

$699,591,846 GSA

$541,627,409 Relief

FY04 Final GSA assumes the $7.6 M Supplemental/Transfer – Recommend $30 M for Final Adjustments for FY05 Phase 2 of the Poverty Formula Assumes a 66% Hold Harmless and 50% increase.

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EDUCATION AND FISCAL RESPONSIBILITY ACT LEGISLATIVE OUTLINE - SB750

BENEFITS OF SB750 For Public Schools:

Funds a quality education statewide by phasing in an increase of the foundation level over four years to an amount that fully funds the minimum recommended by the Education Funding Advisory Board.

Most of the funding enhancements are phased in over four years, allowing schools to adjust to the enhanced funding in an accountable way, ensuring the best utilization of the funds.

Implements a four-year phase-in of an increase in the special education reimbursement from its current level of $8,000 per teacher to $19,000.

Implements a four-year phase-in of an increase of $180 million for Early Childhood Education programs. Creates an education venture pool that will target up to $300 million annually to fund educational programs for schools that have

to contend with concentrated poverty, to help improve test scores and address the achievement gap. Enforces the education funding with a confirming appropriation.

For Public Universities and Community Colleges: Phases in an additional $300 million for the state’s institutions of higher education, helping keep Illinois competitive in a global

economy. For Taxpayers: Provides over $2.7 billion of needed property tax relief statewide, helping homeowners and reducing fixed business costs. Provides almost $1 billion of tax relief to hardworking middle and low income families through a refundable family tax credit, which

effectively ensures the bottom 60% of income earners in Illinois will not, on average, pay any more in taxes than they did before SB 750 becomes law.

Keeps Illinois one of the lowest taxing states in the nation – ranking in the bottom10 in tax burden as a percentage of income. For the Business and Economy: Decreases direct taxation of businesses by almost $400 million per year. Investing more in education will create the numerate, literate workforce that is attractive to business. The refundable tax credit to low and moderate income families creates an economic stimulus for local communities. For the State Budget:

Puts the state’s fiscal house in order. Allows Illinois to pay its current bills and its accumulated $42 billion unfunded pension liability – the worst in the nation. Increases the personal income tax from 3 to 5% Increases the corporate income tax from 4.8 to 8 % Expands the sales tax base to include consumer services only

For Health and Human Services: Makes Illinois state government solvent and fiscally capable of maintaining the human service, health, public sector, and

environmental programs it provides today without cuts. A Cost of doing Business Fund set aside of over $170 million annually

SB

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SB

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For More Information:

• Center for Tax and Budget Accountability

www.ctbaonline.org

Ralph M. MartireExecutive Director(312) [email protected]

Chrissy A. ManciniDirector of Budget and Policy Analysis(312) [email protected]

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what is the problem that causes all other problems?

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