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New FPC report — tax cuts won’t improve the economy or create jobs

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Allowing current state income tax rates to expire will cause a revenue collapse that would threaten Illinois’ economic recovery, curtail the ability to support vital investments, and create more uncertainty over how the state will meet its many obligations, a new FPC report released today finds.

The report, “Poor Finances, Uncertainty about Looming Revenue Collapse Threaten State Economy,” makes clear tax cuts are the wrong course. As states around the country have found, reducing taxes won’t create jobs or improve economic growth. If anything, the state’s economy is hurt by cutting support for the building blocks of job creation and widespread prosperity — like schools, health care, transportation, and safe communities.

The report shows that, besides causing deep reductions in support for crucial public services, the revenue loss if current tax rates decrease as scheduled January 1, 2015 means progress in reducing the state’s backlog of unpaid bills would come to a halt — and almost certainly be reversed. Furthermore, if lawmakers don’t prevent the revenue collapse,

uncertainty regarding the state’s finances, service levels, and long-term tax rates will only increase. In fact, the credit rating agencies have warned that additional downgrades are likely if revenue collapses at the end of 2014.  According to Fitch Ratings, avoiding further downgrades “will require timely action in advance of the expiration of temporary tax increases in fiscal [year] 2015.” On the other hand, if Illinois maintains stable revenue, it can continue to make progress in getting back on the right track.

Stable, sustainable revenue requires maintaining the current income tax rates or implementing a fair tax, where those who make more money pay higher rates, and those who make less pay lower rates. 

Among reasons why cutting state taxes will not improve the economy, the report found:

  • Illinois must balance its budget. Revenue losses need to be offset by state spending cuts, which ultimately flow into the Illinois economy through spending on salaries and contracts. This reduction in state spending offsets any economic gains associated with reduced tax rates.
  • Businesses are started or expanded because of demand. Businesses make investments when they think those investments will lead to profitable sales; they do not invest simply because they have more cash.
  • High-income individuals, who benefit most from income tax cuts, are less likely to spend the savings in-state. They tend, more than other people, to save their tax cuts or spend the money outside Illinois, neither of which helps the state’s economy. 
  • Money from reduced corporate income taxes often flows out of state. Corporations that pay Illinois income taxes will spend much of any tax cut on dividends to shareholders outside Illinois and expenditures to out-of-state suppliers and employees.
  • State corporate taxes are a small part of a business’s expenses – just a quarter of one percent. Labor costs are 100 times greater than state corporate income tax costs.
  • Illinois figures corporate income tax only on sales in the state.  Since a corporation’s Illinois income tax liability is not tied to the location of its headquarters, offices, or other facilities, cutting corporate income taxes is a negligible incentive for job creation in the state. 

The report highlights the two divergent paths lawmakers can choose to take:

If lawmakers follow the path of allowing current rates to expire, there will be massive revenue collapses, further credit downgrades, billions of dollars of cuts to education and critical services, an increase in the backlog of unpaid bills, and more uncertainty for investors and businesses.  All of this in pursuit of the unfounded hope that tax cuts will somehow spur our economy.  Down the other path, Illinois will maintain stable and sustainable revenue that will get us back on the right track by paying our bills, educating our children, and funding essential services.  Given Illinois’ precarious situation, the right path is clear. 

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