We weren't too pleased with the Civic Federation's budget analysis last spring. This year, the group's budget proposal is more comprehensive and thoughtful. But it's not perfect.
We weren't too pleased with the Civic Federation's budget analysis last spring. We even deemed any politician, think tank, or editorial board that calls for spending reductions without identifying specific program cuts in violation of the "Civic Fed rule."
Today, the taxpayer watchdog group unveiled a FY 2011 budget proposal of its own, weeks ahead of Gov. Pat Quinn's fiscal address. Titled "A Fiscal Rehabilitation Plan for the State of Illinois," it represents a more comprehensive and thoughtful attempt to grapple with the state's massive deficit than last year's paper. While it's an improvement, there are still some major problems with the Federation's latest proposal.
The Civic Fed's plan:
The biggest difference between the FY 2010 and 2011 report is the group's stance on the state income tax rate.
Last year, they criticized Gov. Pat Quinn's proposed tax hike as too large, instead supporting a modest increase in the personal rate to 4 percent and no change in the corporate rate. Not this time around.
In 2011, the group suggests lawmakers bump the personal income tax up from 3 to 5 percent (as Quinn proposed) and the corporate rate from 4.8 to 6.2 percent. "The Civic Federation does not enjoy advocating a significant tax increase in the middle of a recession," writes President Laurence Msall. "However, continuing to do nothing would be by far a worse option." The group also supports a $1 hike in the state cigarette tax, which would generate $300 million per year and has similar trade-offs to a soda tax. Furthermore, they propose taxing retirement income for both private and public pensions for savings of $1.6 billion annually.
The group also declares that lawmakers should not pass any tax increases until spending cuts and additional pension reforms are enacted. The paper proposes reducing all agency funding to 2007 levels -- excluding Medicaid spending and General State Aid for elementary and secondary education (in order to protect federal matching funds). Such cuts would represent an approximately 6.2 percent reduction in general revenue spending.
On the pension front, all new state employees would be put in plans that do not allow retirement with full benefits until the Social Security age of 67. (Over the next 35 years, the Pension Modernization Task Force estimates that increasing the retirement age would save $88.3 billion.) The Federation plan also proposed that existing workers pay an additional 1 percent of their income into the retirement system.
If this budget plan were enacted, Illinois would pay down more than $10 billion of its $12.8 billion deficit in FY 2011. The remaining $2.1 billion would be left over until the following fiscal year, when tax receipts would hopefully rebound somewhat. And when the state regains its footing later this decade, all other new revenue the plan generates would be used to catch up on the state's pension obligations.
What's wrong with it:
The Federation should be applauded for dealing honestly with the state's fiscal crisis. This plan is far better than any "proposal" the Illinois Republican Party has put forward, for example. But that doesn't mean it can't be improved.
For starters, this plan unfairly targets public employees and retirees, even though experts agree that the primary cause of the state's enormous pension debt was insufficient contributions from the state, not the size of worker benefit packages. Not only will current state workers have to pay more in income taxes, but the Civic Fed would ask them to fork over more of their earnings into the retirement system. Future workers would also have to work longer to max out their benefits, which on average come to about $17,000 annually. And all workers, not just those 4,000 pensioners that take in over $100,000 annually, would pay taxes on their retirement benefits.
The Federation also leaves out the Democratic proposals to offset the tax increase for low- and middle-income families. There is no increase in the personal exemption, as Gov. Quinn has proposed. It also means no increase in the property tax credit or the Earned Income Tax Credit, as were included in previous versions of HB 174, which the Responsible Budget Coalition supports. As is usual in Illinois, the poor will bear the heaviest burden, even as services on which they rely are slashed.
Speaking of state services, the Sun-Times editorial board notes the effect of the Federation's across-the-board spending reduction:
This, unfortunately, puts the burden for spending cuts squarely on important social services, such as care for seniors, abused and neglected children and the mentally and physically disabled.
If the federation really thinks that's the way to go, it should spell out and stand behind each and every painful cut they'd like to see.
Indeed, while the Federation is more specific in this report than last year's, they still manage to avoid laying out these gruesome details. It's also important to remember that state lawmakers have not invested adequately in human services for a decade. It's unclear how much more room waste service providers can trim. (Look for more on this topic later this week.)
And what about the state sales tax? We know that the service economy represents 45 percent of the state's business but Illinois takes in just 16.6 percent of its revenue via the general sales tax, eight percent less than the national average. Yet the report only proposes a feasibility study for extending the sales tax to consumer services. Modernizing and expanding fees on non-essential goods and services could net an additional $7 billion a year, according to the Government Accountability Office, which could pay for the tax shielding mechanisms and fill some of the gap the Fed leaves for 2012. It should play a role in any sustainable budget plan.