Illinois do-it-yourself tax increase worksheet

By MICHAEL D. KLEMENS

Here we go again. Gov. James R. Thompson has promised to propose a tax hike for the budget year that begins July 1. House Speaker Michael J. Madigan (D-30, Chicago) says he is unconvinced that taxes should be hiked. Sound familiar? It should. The refrain is the same one taxpayers have heard for two years.

The governor has had two chances to raise taxes. Maybe somebody else should give it a try; maybe you could do a better job. You certainly could do no worse. To help you we offer the Illinois do-it-yourself tax increase worksheet. Some assembly is required.

Do not hesitate to embark on this exercise because you do not understand state tax policy. That poses no problem because there is no tax policy in Illinois. As close as the state comes to a policy is the conviction that the personal income tax form be kept simple.

And before you get too far along on the process, let us clear up the question of tax burden. The governor says taxes are low. The speaker says taxes are high. Both are right — sort of. State taxes in Illinois are low. Local taxes, particularly property taxes, are high. (In some places they are very high.) The two average out to a moderate tax burden. In 1986 state and local tax collections per capita stood at $1,546.46, within one dollar of the national average.

Now you are ready to begin. The first thing that you must do is decide which tax or taxes you want to raise. The target for the last two years has been the income tax. The personal income tax rate in Illinois is currently 2.5 percent, the same rate that was in effect when the tax was passed in 1969. Likewise, the corporate rate remains at its 1969 level of 4 percent. Both are low compared to other states. Personal income tax collections per $1,000 of personal income were 65.3 percent of the national average in 1986. Corporate collections were 82.5 percent of the U.S. average. Besides being relatively low, the income tax is deductible on the federal tax forms, so that Uncle Sam returns some of what the state takes.

Then you have to decide how much you want to raise income taxes. Thompson last year sought "modest" 40 percent increases in the tax rate, from 2.5 to 3.5 percent for individuals and from 4 to 5.6 percent for corporations. Others have suggested a "modest" 20 percent increase to 3 percent on the individual rate and 4.8 percent on the corporate. Take a clue, no matter how large a rate increase you propose, it should be "modest."

Now — a "modest" 20 percent increase would generate about $720 million in new revenues. A "modest" 40 percent rate increase would generate twice that, or $1.44 billion. The income tax is the simplest tax to boost, but it is not the sole possibility!
Other candidates:

• Extending the sales tax to junk food — the Twinkie tax. When lawmakers exempted groceries from the sales tax, did they really intend that such counter- nutritional items should not be taxed? Yield from this increase — you can call it closing a loophole or even reform — $50 million.
• Extending the sales tax to nonprescription drugs — the Crest tax. When lawmakers exempted drugs from the sales tax, did they intend to exempt medicated shampoo and fluoridated toothpaste? Yield here is $35 million. It, too, can be called closing a loophole.
• Extending the sales tax to computer software purchased off the shelf. The yield here is $24 million, and the tax qualifies as loophole closing or base broadening.
• Imposing a tax on cigars, chewing tobacco and snuff, tobacco products that now escape the cigarette tax. That change would yield $10 million and would qualify as good public health policy.
• Raising the per pack tax on cigarettes by a nickel, yielding approximately $60

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million and similarly qualifying as good public health policy.
• Boosting taxes on liquor, wine and beer to national averages for those products, raising $58 million and qualifying as good public health and sound traffic safety policy.
• Raising motor fuel taxes by 5 cents per gallon, raising $250 million.
• Imposing a 13 cent per gallon tax on aviation jet fuel, raising $90 million.
• Closing a loophole that lets large customers buy natural gas on the spot market, legally avoiding a tax they would have to pay if they purchased it from a utility, raising $25 million.
• Making any number of radical changes like taxing groceries, drugs or legal fees (see box on next page).

Before you decide how much to raise taxes, though, it may be best to decide what you need money for. Existing state services are an obvious choice. There are also calls to reform the budgetary process and the property tax system. And finally, throwing a bone to business enhances chances of passage.

Among the state tax-eaters education's needs stand tallest. Educators from both the public schools and the public universities and colleges have made strong arguments that they need more money. They have even gotten some recognition of that from business groups. The State Board of Education wants $404 million in new state funds. The public universities have asked the Board of Higher Education for $435 million in new general funds money.

Human services also have unmet needs. Welfare recipients have gone four years without increases in basic grants and have sunk progressively deeper below the poverty level. Caseloads at the Department of Children and Family Services are unmanageable. The Department of Mental Health and Developmental Disabilities faces court actions on the quality of institutional care and admits that community services are inadequate.

And then there are property taxes. One proposal would freeze property taxes for a year by requiring that the taxes be levied on the previous year's equalized assessed valuation. That would prevent tax rates being set higher than needed because the final property values are unknown. Making up for the loss to local governments would cost the state $225 million,

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one time. Another proposal would allow taxpayers to take a 10 percent credit against their income taxes for property taxes paid on their homes. First-year cost for that would be $230 million.

Fiscal reform has drawn plenty of attention in these tight budget times. Boosting the budgetary balance to $300 million would cost $55 million. Moving pension funding to a system that pays for benefits as they are earned would initially cost $140 million per year but would eventually save money.

Business tax breaks could include the provision sought by manufacturers to eliminate the sales tax on energy used in the manufacturing process, a tax they claim must not be paid in many other states. That would cost as much as $140 million. Likewise the state could move to shore up funding of the unemployment insurance system, heading off the need for higher employer tax rates and lower employee benefits should a recession occur.

And then there are the unpaid bills. The governor's Bureau of the Budget estimates that unpaid corporate refunds will stand at $100 million on June 30. Another $21 million will be owed for circuit breaker payments and $19 million for group insurance. All are one-shot catchups.

There is no shortage of spending possibilities. Nor is there any limit to the tax increase you can propose, as long as it's ' 'modest.'' Now the trick is to balance the two, deciding what kind of spending you want and how to pay for it. Here's a sample proposal:

1. Increase income tax rates a modest 20 percent, raising $720 million.
2. Broaden the sales tax base by closing loopholes that allow junk food, non-prescription drugs, out-of-state natural gas and computer software to escape taxation, raising $110 million.
3. Establish sound public policy by taxing noncigarette tobacco products and increasing cigarette and liquor taxes, raising $145 million.

Total haul is a "modest" $975 million. Add to that the $480 million that would be projected from 4 percent "natural revenue growth" on the current year's base, and there is $1,455 billion in new money that could be spent in the general funds. Here's how you could spend it:

• Elementary and secondary education, $400 million, 99 percent of their budget request.
• Higher education, $200 million, continuing the practice of giving them half of what lower education gets.
• All other agencies, $200 million.
• Paying $140 million in old bills for corporate income tax refunds and circuit breaker payments.
• Taking a first step in building the balance to $275 million, a $30 million item.
• Making local property taxes levied at the previous year's equalized assessed valuation and reimbursing local governments for the loss, $225 million.
• Boosting the sales tax transfer to the motor fuel tax fund from 2.5 percent to 10 percent, an additional $260 million. Such a maneuver generates money for roads without raising gasoline taxes. The switch provides a growth revenue to a fund that sees no growth and could postpone some of the almost annual requests for gasoline tax increases.

The reimbursement to local governments and payment of old bills will require only a onetime payment. In the second year (fiscal year 1991 — the year beginning July 1, 1990), you could spend that money, plus another $90 million from a full year's implementation of the income tax increase — or a total of $455 million. That would cover offering a 10 percent residential property tax credit on the income tax, a $250 item, and leave $205 million plus natural revenue growth for new spending. That could go in part to a phaseout of the sales tax on energy used in manufacturing pension reform, further balance builing and/or new education, human service or agency spending.

That's one plan. It is under $1 billion. It provides some budgetary reform and all that public schools seek this year. There are elemments of property tax relief and a tax break business. The greater reliance on the personal income tax and the base broadening with the sales tax will stabilize revenues. The plan avoids a gasoline tax increase. And it steers away from the kind of radical changes that arouse wrath and doom such requests. Call it the "education-enhancing, road-repairing, base-broadening, business-boosting, revenue enhancement plan."

Call it whatever you want, but recognize its weaknesses. First, the plan allocates all "natural growth" to new spending, thereby ignoring inflation's toll on services. There is too little money for some things. Reform of the school aid formula could take $400 million itself. Total funding for preschool programs would cost more than $200 million alone. Similarly, to build an effective mental health system estimates run to $300 million. The property tax relief and shift in road funding add features that may attract some support, but both limit state spending options. The money to make wholesale changes in the way the state finances schools could, for example, require immodest tax increases.

You can probably construct as good a tax plan yourself. First, rip these pages out of the magazine. Cut out the potential tax increases and put them in one pile. Add your own. Cut out the spending possibilities and put them in another. Add your own. Draw a line down the center of a piece of paper. Choose your revenue increases and paste them on one side. Choose your spending hikes and paste them on the other. If they balance and the if speaker, the governor and the business community sign on, you win. So do educators and human service agencies who will undoubtedly enshrine you in their hall of fame.

12 | January 1989 | Illinois Issues