By Michael A. Finch, Joseph L. Bast, and Patrick T. Foys
Some Predictions
In January 1995, Illinois’ Bureau of the Budget is expected to announce that revenues for the current fiscal year will fall approximately 3 percent short of spending, producing a “budget gap” of between $1 billion and $1.5 billion. Shortly after this announcement, the Chicago Public Schools will probably release a “preliminary estimate” of its own impending budget deficit and ask the state for a $300 million to $500 million bail-out. Adding to the sense of urgency will be a scramble to find several hundred million dollars to fund a “truth in sentencing” policy, which has been endorsed by one leading candidate for Governor and probably will be endorsed soon by the other.
The common wisdom will be that a permanent income tax increase is necessary to close the budget gap, adequately fund the schools, and make our streets safe again. The state’s most powerful special interest groups — the teachers unions, public employee unions, and welfare lobby — will wage a well-financed campaign for higher taxes. The Chicago Tribune and Chicago Sun-Times will editorialize repeatedly for higher income taxes. Opinion polls will show that approximately half of Illinois voters would support higher taxes, provided the money was used to improve schools or fight crime.
How do we know these things will happen next year? One hardly needs a crystal ball to make these predictions. The same pattern has been played over and over again in recent years. Among state legislators, the looming “budget gap” and Chicago Public Schools “crisis” are common knowledge. The pro-tax-hike interest groups already have formed a coalition — called “Progress Illinois” — and have assembled a war chest for next year. Only Illinois taxpayers seem unaware of the battle about to begin.
The last time Illinois faced such a budget crisis, in 1991–1992, Governor Jim Edgar chose to cut appropriates by $273 million rather than support an income tax increase. Special interest groups were outraged and attempted to increase taxes through a constitutional amendment placed on the ballot in 1992. Voters defeated this effort.
We believe that the average Illinois voter, if given the choice, would prefer that state spending be trimmed by a very modest 3 percent rather than see a permanent tax increase. Having studied Illinois’ business climate and state budget, we are confident that state government can live within its means, without a tax hike.
This will not be easy, of course. Special interest group leaders must be reminded that they are part of the larger public, and that lobbying for their own narrow interest is really hurting the state. And elected officials must be told that they should concentrate on fulfilling old promises, rather than making new ones. The state should solve its mounting debt problem before taking on new commitments. Communicating these messages is the fundamental purpose of this report.
Organization of this Report
In Part 1, we review the changes in Illinois’ tax burden, economic growth, and state spending in recent years. While Governor Edgar attempted to slow the growth of spending by squeezing out waste and mismanagement, we find that his efforts were overwhelmed by growth in spending on major entitlement programs. Consequently, the first three Edgar years witnessed a pattern of spending increases more rapid than occurred during the Thompson years. This rapid increase in spending was financed from natural revenue growth and the accumulation of debt, rather than by general tax increases.
In Part 2, we project state revenues and expenditures to 1998. We ask whether natural revenue growth during the next four years will be sufficient to produce a balanced budget each year, and what assumptions or changes must be made regarding state spending to achieve that goal during these years. We conclude that natural revenue growth indeed will be sufficient to offset expected increases in state spending, but only if action is taken to control spending in at least three key areas: public aid, social services, and administrative services.
In Part 3, we examine the likely effects of tax increases on job creation, economic growth, and public education. We find strong academic agreement that high and rising taxes would mean fewer new jobs and slower rates of growth in personal income. We also evaluate the case for shifting a larger share of the state’s tax burden to state income taxpayers, or creating a graduated income tax structure. We find a very weak and one-sided “equity” case for increasing reliance on income taxes or making income tax rates graduated. In fact, we find that graduated-rate income taxes are more destructive of jobs and economic growth than are flat-rate income taxes or other kinds of taxes.
Part 4 examines potential budget savings. We outline reform proposals that would control spending without compromising the quality of public services. While the level of spending restraint we propose will require a bold approach to curbing the state’s entitlement programs, we find precedents in other states for the recommendations we make. Achieving this degree of spending restraint would enable a Governor to give back some $1.6 billion to taxpayers in 1995, and nearly $11 billion in 1998. The Governor might do this by financing a state education voucher program, reducing or rescinding the four tax hikes approved during the past three years, and/or increasing the income tax deduction for dependents.
Part 5 briefly summarizes the findings of the study. We find that a candidate for Governor can keep a “no tax increases” pledge for the length of the term provided he or she is willing to confront the three major spending departments. Since the types of policies we propose to contain spending in these areas already have been adopted in other states, the candidate need not call for “radical” or untried policy chan.
