Post by Deleted on Dec 26, 2014 5:50:31 GMT -6
The state needs something on the order of $35 billion a year to stay afloat. What’s the best way to get it? “Best,” of course, is in the beholder’s eye, but a few basics prevail. Taxes should be as low, broad-based and as stable as possible. Fair would be a big plus. These rubrics remain regardless of political persuasion.
Conservatives say taxes are too high and warn that proposals to replace the state’s flat income tax with a graduated tax would hurt the state’s business climate. Liberals say that the tax burden now is disproportionately borne by the poor and that most taxpayers would realize tax savings while the state collected more under a graduated tax.
Add it all up and, according to the institute, the poorest 20 percent of the state’s residents who take in an average of $10,100 pay 13.8 percent of their income in taxes, the second-highest state tax burden, percentage wise, for poor people in the entire nation. Meanwhile, the richest 1 percent who pull in an average of $1,489,200 a year pay 4.9 percent; the national average is 5.6 percent for the highest earners.
The state’s credit rating is the lowest in the nation, which increases borrowing costs. Future revenue prospects are, at best, uncertain thanks to the scheduled rollback in 2015 of income tax hikes instituted in 2011.
The tax base in Illinois is extraordinarily narrow compared with other states, largely because the state, by and large, doesn’t tax services.
Estimates vary, but as much as 60 percent of economic activity in Illinois goes untaxed as barbers cut hair, lawyers dispense advice, accountants crunch numbers, plumbers fix pipes, and so on, without the state taking a cut. The average state taxes 56 services, according to a 2011 report by the state Commission on Government Forecasting and Accountability, while Illinois taxes just 17, with all but five coming from taxes on utilities. Hawaii, which taxes 160 services, tops the nation in service taxes, with Washington and New Mexico, each taxing 158 services, close behind.
The bottom line is, we have to tax services, says Ralph Martire, executive director of the Center for Tax and Budget Accountability, a nonprofit think tank that draws criticism from some conservatives as being too liberal.
Retirees are next up in our sacred-cow slaughterhouse. Illinois is just one of four states that exempt retirement income from taxes. The reason lies at the ballot box, according to Henchman.
“The only reason it is exempt is because of the voting power of retirees,” Henchman says. “If it’s income, it should be subject to the income tax.”
Between taxing services and retirees, the state would raise, under the most conservative estimates, $4.6 billion a year, plus whatever a tax on groceries brings in. Given that our exercise in designing a new tax system is a zero-sum game, where should existing taxes be reduced?
Property taxes in Illinois are more than 20 percent higher than the national average, according to the Institute on Taxation and Economic Policy, while personal income taxes are nearly 26 percent lower than the average, and sales and excise taxes are more than 10 percent lower.
Property taxes now are largely devoted to supporting schools and local governments, but under our ideal scenario, the new state revenue raised by taxes on retirees and services would replace revenue generated by property taxes.
Regardless of whether Illinois adopts a graduated income tax, there remains plenty of room for improvement that can be accomplished short of amending the Constitution. A tax system, Martire says, should be fair, stable, efficient and responsive to economic conditions. “Illinois is oh-for-four,” he says. “It doesn’t work.”
illinoisissues.uis.edu/archives/2014/12/broken2.html
