PI Original Angela Caputo Wednesday November 25th, 2009, 11:28am

Study: Tax Increase Is Illinois' Only Option

The Institute of Government and Public Affairs is preparing a report that calls for "a two-pronged plan" to raise revenue by hiking the state's income tax rate and expanding sales taxes to services.

Illinois finances have been on shaky ground for the better part of the past decade. As a result, transit doomsdays, school funding referendums, and the threat of human service cuts emerge, like clockwork, every year. But the fact that the state has slipped so quickly from "the middle of the pack" in financial stability to the bottom should be a "wake up call," according to University of Illinois economist Daniel McMillen. Along with his colleagues at the school's Institute of Government and Public Affairs, McMillen is preparing a report that calls for "a two-pronged plan" to raise revenue by hiking the state's income tax rate and expanding sales taxes to services.  McMillen offers this teaser on the forthcoming study:

“In the end, I think we have to face up to the fact that Illinois has to have higher taxes,” he said. “Budget cuts can’t close a gap this wide and worsening. It’s just not possible with major expenses like pension and Medicaid obligations that you simply can’t reduce.” [...]

“It’s better to have a mix of taxes rather than to rely on any one tax too heavily,” he said. “We have a relatively low income-tax rate and we have a sales tax that is not very broad based, so it’s really hurting state government.”

 While the full document is yet to be released, this report appears to reaffirm something we've pointed out repeatedly: Illinois' tax structure is unbalanced and outdated. Instead of taxing the fastest growing segment of the economy -- services -- Illinois only applies the sales tax to goods (and at an extremely high rate).  By expanding the tax, the state could net an additional $7 billion a year, according to the Government Accountability Office. Meanwhile, raising the income tax rate from 3 percent to 5 percent would generate $4 billion more a year.

State Sen. James Meeks' (D-Chicago) HB 174, which was passed by his chamber in May but never called for a vote in the House, proposed raising both the personal and corporate income tax and expanding the sales tax to more than three-dozen consumer services.  But after factoring in various tax relief proposals -- raising the personal exemption from $2,000 to $3,000, doubling the state property tax credit, and tripling the Earned Income Tax Credit -- lawmakers projected the proposal would generate an additional $5.2 billion a year. We're waiting to see a revised version of that bill emerge next year

With the estimated FY2011 deficit hovering around $12 billion and the state already borrowing to the hilt, taking tax hikes off the table is simply not an option, the U of I researchers conclude. “We’re bridging the gap now by borrowing, with a bad bond rating that drives up interest rates,” McMillen says. “So people in the future will be paying for the fact that we aren’t fixing the problem today.”

Stay tuned for a more comprehensive analysis of the study when it's released in February.

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