Home > Blog

Tax cuts won’t attract entrepreneurs

Illinois should think twice before letting the income tax rate drop at the end of this year because cutting personal income taxes won’t attract entrepreneurs, according to Michael Mazerov of the Center on Budget and Policy Priorities.

The 150 executives surveyed by Endeavor Insight, a research firm that examines how entrepreneurs contribute to job creation and long-term economic growth, said a skilled workforce and high quality of life were the main reasons why they founded their companies where they did; taxes weren’t a significant factor. This suggests that states that cut taxes and then address the revenue loss by letting their schools, parks, roads, and public safety deteriorate will become less attractive to the kinds of people who found high-growth companies.

This is particularly relevant for Illinois this year. Unless the General Assembly acts, there will be a massive revenue collapse when income tax rates automatically decline at midnight on January 1, 2015 (halfway through fiscal year 2015). In fiscal year 2015, the General Assembly would have to enact draconian cuts to investments if they don’t maintain stable and sustainable revenue. In fiscal year 2016, lawmakers would have to cut billions more.

To get Illinois back on the right track, lawmakers must:

  • Pay down the backlog of unpaid bills that harms Illinois’ reputation;
  • Invest in world-class schools and universities for our children to create an educated and skilled workforce; 
  • Fund essential services such as prenatal care, homeless prevention, and child protection; and 
  • Improve infrastructure such as roads, public transit systems, and airports that will allow Illinois to compete in the global economy.

All of these things will be impossible if revenue collapses at the end of 2014. We should not further undermine our state’s finances, the quality of our schools, and basic public services to provide large tax cuts when, according to Endeavor Insight’s survey, “the founders [of high-growth companies] in our survey rarely cite low tax rates” as a reason for locating in a specific city.

New fact sheet and FAQ on maintaining stable, sustainable revenue

Check out Voices’ new fact sheet and FAQ: “Maintain Stable, Sustainable Revenue for Kids and Families”.

In the face of at least a $2.3 billion budget shortfall for fiscal year 2015, which begins July 1, lawmakers have two choices:

  • They can make at least $2.3 billion in cuts to education, human services, public safety, and other essential services—cuts that our families and communities cannot afford.  

OR

  • They can avoid the cuts and get Illinois back on the right track by maintaining stable and sustainable revenue to educate our children, fund essential services, and pay our bills.

 

Download (PDF, 1.36MB)

Don’t launch another torpedo at Illinois’ finances

Cutting the corporate income tax in half – from 7 percent to 3.5 percent – as House Speaker Michael Madigan recently proposed – would significantly worsen Illinois’ already dire financial outlook and force even deeper cuts to key areas, such as education, that are important for the state’s long-term economic growth.

Revenue-Loss-Cutting-Corp-Income-Tax

The annual revenue losses and resulting cuts to services would quickly add up. Over the next three fiscal years, the state is likely to lose well over $5 billion in revenue if the corporate income tax is slashed, according to Fiscal Policy Center estimates based on data from the Governor’s Office of Management and Budget.

The combined pain of deep budget cuts to essential services and rapid deterioration of the state’s finances – just when the state is beginning to make some progress digging out of its hole – mean that cutting the corporate tax rate will harm, not help, our economy. 

To understand why, just take a look at the state’s still-precarious situation:

  • Illinois still has billions in unpaid bills. Despite having paid down billions in outstanding bills, the backlog is still expected to be over $5 billion by the end of this fiscal year. 
  • Key investments such as education have been cut deeply in the last few years. Illinois has cut almost $1 billion from K-12 and higher education between FY 2009 and FY 2013. Other important state investments, such as afterschool programs and prenatal services, have also seen huge cuts.
  • Illinois’ credit rating is the worst of any state. The major credit rating agencies have explicitly warned that collapsing revenue will likely lead to more credit rating downgrades. Further downgrades would increase the cost of financing infrastructure projects – like major road and bridge repairs – that help generate economic growth. It also would further harm Illinois’ already battered reputation.

The corporate income tax cut would make all these problems worse by launching another torpedo at Illinois’ finances and significantly increasing uncertainty for businesses. Furthermore, the link between corporate tax cuts and economic growth is negligible.

Rather than acting on the mistaken belief that cutting corporate taxes will spur economic growth, lawmakers should instead take a broader view of what it means to be “business friendly.” In survey after survey, business leaders say they want high-quality infrastructure and an educated workforce that allow them to compete. To meet these needs, our state needs to be spending more, not less, on improving our transportation systems and educating children from the earliest age.

The way to get Illinois back on track is to maintain stable and sustainable revenue, pay our state’s bills, and prevent further harmful cuts to areas like education that are crucial to our future economic growth.

Senate President: Revenue collapse to cause nearly $3 billion budget hole

Senate President John Cullerton laid out the consequences of the approaching revenue collapse in stark terms yesterday.

According to Cullerton, the combined decrease in revenue and increase in mandatory expenses that the state cannot avoid will lead to “a $2.9 billion shortfall.” While Cullerton invited other lawmakers to be part of a discussion to find a “bipartisan solution for this three million problem,” the solution is clear: To get Illinois back on the right track, we need to maintain stable and sustainable revenue to educate our children, fund essential services, and pay our bills.

No longer a leader in early childhood investments

A new FPC report lays bare the significant erosion of Illinois’ investments in early childhood.

For example, past progress has been eroded in:

  • Access to preschool. After making steady progress from fiscal years 2003 to 2009, nearly $80 million (21%) has since been cut from the Early Childhood Block Grant. As a result, 20,000 fewer three- and four-year-olds are able to attend preschool this school year than in 2009 – 2010.
  • Child care assistance. When established in 1997, the Child Care Assistance Program created broad access to assistance for low-income, working families. Having child care assistance enables parents to keep their jobs and high-quality child care contributes to children’s healthy development and well-being. Unfortunately, in recent years, funding and income eligibility have been reduced, and family co-payments have increased substantially.

Rise-and-Fall-of-Preschool-Funding

The report warns of an “ominous” outlook for early childhood investments for fiscal year 2015, which begins July 1. This is because current income tax rates are scheduled to automatically decline at midnight January 1, 2015. If the General Assembly does not maintain stable and sustainable revenue,

Illinois would lose more than $2 billion in revenue in FY 2015 and close to $5 billion in FY 2016…Such huge revenue losses would require enormous cuts in nearly every part of the state budget. But programs not protected by federal funds or federal mandates — for example, the Early Childhood Block Grant — would be especially vulnerable.

This erosion of funding for early childhood is symptomatic of Illinois’s poor fiscal health. In order to support the healthy development and education of our most valuable resources—our children—Illinois must get its fiscal house in order. It is crucial that Illinois maintain stable and sustainable revenue to get our state back on the right track.

The powerful anti-poverty effects of food assistance

New estimates from the Brookings Institution confirm the powerful anti-poverty effects of SNAP (formerly food stamps). In Illinois alone, an average of 205,000 individuals – including 94,000 children – were lifted out of poverty each year between 2009 and 2012, according to the Brookings’ estimates.*

Jane Williams and Elizabeth Kneebone of Brookings point out the importance of SNAP to vulnerable populations:

An overwhelmingly large percentage (87 percent) of SNAP recipients live in households with children, seniors, or people with disabilities. Upwards of 21 million children in the United States—more than one in four nationally—live in households receiving monthly food support through SNAP.

With today’s Presidential signing of the new Farm Bill, which includes over $8 billion in cuts to SNAP, we need to protect SNAP from further cuts that would undermine one of our nation’s most powerful anti-poverty programs.

 

*The Brooking Institution’s state-level estimates are based on national estimates from the Supplemental Poverty Measure (SPM). The SPM differs from the traditional poverty measure, developed in the 1960s, by including the effects of many government programs that are not counted in the traditional measure.

Illinois gets poor marks on long-term budget planning

Illinois ranks among the worst states in the country when it comes to long-term fiscal planning, according to “Budgeting for the Future,” a new report from the Center on Budget and Policy Priorities. Given the state’s chronic budget problems, this low rating (in the bottom eight) shouldn’t be surprising.

IL Fiscal Planning Ranking

The benefits of effective fiscal planning tools include encouraging policymakers to consider the long-term consequences of budget choices, improving fiscal stability and ensuring more predictable funding for essential services, and reducing uncertainty for families, businesses, and local communities.

Here are some examples of how Illinois falls short:

  • Consensus revenue estimates: The Center’s report recommends that more states use a consensus revenue forecasting process to determine available resources for the coming fiscal year. Such a process should be transparent and should involve representatives from both the executive and legislative branches, as well as independent outside experts. In Illinois, disagreements about revenue numbers have created confusion and stalemate about balancing the budget. In each of the past three years, the Governor and General Assembly have used different revenue estimates. For the FY 2012 budget, the two legislative chambers adopted competing estimates that were never reconciled. The General Assembly has often failed to approve estimates prepared by its own Commission on Government Forecasting and Accountability, which has a strong track record for accuracy.
  • Budget projections: The report recommends that the state officials use five-year projections of revenues and expenditures to guide the budget process. These projections should be readily accessible to the public and should include detailed breakdowns by revenue sources and by agency spending. In Illinois, the Governor’s Office of Management and Budget (GOMB) publishes a three-year budget forecast each January. In contrast to previous years, the 2014 GOMB forecast included projections (rather than budget previews) for both revenues and expenditures. However, the document still doesn’t provide sufficient detail, especially on the spending side.
  • Rainy day fund: “Budgeting for the Future” recommends that all states have well-designed rainy day funds to put aside revenue and build reserves that can be used to deal with budget shortfalls during economic downturns. Illinois is one of only four states without a rainy day fund, which made it much more difficult to cope with the onset of the Great Recession. Before saving for a future rainy day, however, Illinois must clear its existing backlog of unpaid bills. Over the past several years, the state has made substantial progress in reducing the backlog, but it still has a long way to go.

Our current budget problems are the cumulative result of decades of short-sighted decisions. Another series of temporary fixes will only make those problems worse. To restore the state’s fiscal health and strengthen our economy, we need to maintain stable and sustainable revenue, make responsible spending choices, and use effective fiscal planning tools as the basis for sound decisions for a better future.

Posted to Blog, Budget, Revenue, Taxes

Don’t call it a comeback…yet

When the Governor delivered his state of the state address last week and said “Illinois is making a comeback,” many critics raised objections.

Downgrading-our-future-blog-post

Over the past few decades, Illinois has not been the model of fiscal or ethical stability for the nation. And that means there’s a lot of clean up to do to get this state back on the right track.

Here’s the thing: even though we’re not there yet, there is a light at the end of this tunnel.

“Ok Emily,” you might be thinking, “take off your rose-colored glasses.”

But seriously.

Illinois is showing signs of an economic recovery. According to a Philadelphia Federal Reserve Bank forecast, economic growth in Illinois is expected to accelerate to 2.35% in the first half of this year– the fastest of the nation’s five most populous states. And the “Flash Index” (a measure of future economic growth developed at the University of Illinois) indicates the state’s economy ended 2013 on a strong note, which “engendered considerable optimism for 2014.”

In addition, while some argue that lawmakers haven’t worked to cut the budget, the reality is that lawmakers made program cuts to education and human services to the tune of about $1.8 billion since FY 2009. Illinois has also made progress by paying off our bills, reducing the backlog by more than $3 billion, and lawmakers restructured the state-funded pension systems to save about $1 billion a year.

But here’s where things get decidedly less rosy.

The looming revenue collapse — the one that will take place automatically at midnight on January 1, 2015 — will reverse any progress we’ve made, and will plunge Illinois deeper into its hole.

That level of revenue instability is not only bad for kids, families and communities; it’s bad for investor confidence. In FY 2015 alone, we’ll have a budget shortfall of almost $2 billion. You can double that for FY2016.

And where investor confidence plunges, so do credit ratings.

So while there are signs that Illinois is, indeed, in the midst of a comeback, we need to understand that it extends only as far as willingness to maintain stable and sustainable revenue for children, families and communities.

The reality is that unless lawmakers are willing to maintain funding for schools, roads and bridges, public safety and other essential services, we can kiss our comeback goodbye.

Don’t call it a full comeback yet. But with a commitment from lawmakers to maintain fiscal stability, we can get there.

A version of this post also appeared in the Huffington Post.

Cash must be there for Quinn’s pre-K

In a letter published in the Chicago Sun-Times, Voices President Gaylord Gieseke applauds Governor Quinn’s announced birth-to-five initiative that could pay huge “long-term dividends.” But, particularly after deep cuts to education in recent years, she points out such investments require maintaining stable beyond the end of this year:

…budget shortfalls will only get worse this year when current tax rates expire and Illinois faces a revenue collapse. Such massive revenue losses would require enormous budget cuts.

Early education is worth big investments. Let’s be sure that the state has stable, sustainable revenue to maintain vital services that will help Illinois get children, our families, and our communities back on the right track.