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From Governing’s Supplemental information | Introduction
The most conspicuous problem in Illinois is over-reliance on local property taxes to fund the schools. In 2001, the state had the highest average property taxes in the country on homes with a value of $150,000. It was also third to last in state education funding, with only 37 percent of school budgets derived from state monies. The solution might seem obvious: “If you wanted to revise the Illinois tax system,” says Tim Bramlet, president of the Taxpayers’ Federation of Illinois, “you would look to increase income taxes and lower property taxes.” Last year, the Education Funding Advisory Board, a panel appointed by the governor to improve the schools, recommended doing just what Bramlet suggests. It proposed raising state income and sales taxes by $5.3 billion to provide $3.5 billion in lower property taxes and $1.8 billion in additional school spending. But that’s where the complications come into play. The state constitution mandates that the individual income tax be set at a flat rate. Right now, it’s a comparatively low 3 percent. Raising the rate for Illinois residents across the board would make the already-regressive tax structure even more so, because a typical family of four starts paying income tax at $8,000 a year.
This problem doesn’t apply to the corporate income tax, of course, but another problem does. The constitution mandates that the corporate rate — now 4.8 percent — be no more than eight-fifths of the individual rate. So corporate income taxes can’t go up unless individual ones do, too. In addition, Illinois uses a single-sales formula for the corporate income tax base, which means that companies pay only on the sales they make within the state, not on their payrolls or property. State Representative Larry McKeon, of the House Property Tax Reform and School Funding Committee, estimates that Illinois has lost $96 million a year since it moved to the single-sales formula in 1998. But that’s far from the worst loophole in the code. The worst one is this: All retirees’ pension income is exempted from taxation — regardless of how large someone’s fortune might be. This cost the state $664 million in 2001, and raises huge issues of fairness in connection with any proposed increase in the personal rates. “If you want an equitable system, ” says Steve Rauschenberger, chairman of the Senate Appropriations Committee in the past session, “you should not be taxing families working two jobs and telling wealthy retirees that they don’t have to pay.” Legislators avoided the complexities of the income tax issue altogether during last year’s difficult budget session. Revenues fell $728 million in 2002 — the first time they had dropped from the prior year since 1955 — and the state missed its revenue projections by $1.6 billion. To fill the hole — and make a preemptive strike against a continued poor economy — the legislature cut nearly $1 billion in spending, borrowed $1 billion ($700 million of which was used to shore up the general fund), drained the $226 million rainy day fund and raised cigarette and gambling taxes to the tune of $500 million. Those moves weren’t enough. By December, revenues from the cigarette tax — along with the other major taxes — were consistently falling short of projections, and a $600 million gap opened up for the rest of 2003, with the prospect of an additional $2 billion hole out of a general fund budget of $22 billion to cover for 2004. The state is legally required to pay back both the $1 billion short-term loan and the withdrawal from the rainy day fund by the end of 2003. This fiscal bomb has had its impact on the management of the tax system as well as on the size of the deficit. Last spring, the state had to delay tax refunds by months, due to a combination of decreased revenue and more refund requests. Illinois ultimately used $150 million of its short-term loan to cover the individual refunds. But as of early January, $524 million in business refunds were still on hold, with no timetable for payment. One way the state has set about saving money is by offering early retirement to older workers, who tend to be better paid. In a classic example of unintended consequences, a fifth of the Revenue Department’s 2,400-employee workforce has taken the golden handshake. The department may lose 18 percent of its data processors — not a good thing for a state that needs a particularly efficient revenue-raising effort. In some areas, technology has come to the state’s rescue. Illinois has a better-than-average Web site presence for taxpayers, who can check their refund status online. With refunds coming out months late, that’s avoided an endless stream of angry phone calls. Illinois also offers electronic filing. Still, the Revenue Department’s high-tech initiatives are a work in progress. The department needs an integrated tax information system, which it’s trying to construct on its own. There is no data warehouse, and imaging hasn’t been incorporated into the processing of paper returns. “There’s nothing that would benefit us more than imaging,” says Ken Kerber, a former program administrator within the department. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ometimes it’s easy to diagnose the fundamental ills of a state tax system — and to propose cures. Sometimes it’s more complicated. Illinois is a lot more complicated.