The document summarizes Illinois' fiscal crisis and the tax increases passed in 2011 to address a large budget deficit. It describes how Illinois has historically relied too heavily on property taxes and lacked a fair tax system. The tax increases were expected to generate $7.3 billion annually but deficits remain due to inadequate revenues and increasing costs for education, healthcare, and human services. Further reforms and revenue options are needed to structurally address Illinois' budget problems.

1. CENTER FOR TAX AND BUDGET ACCOUNTABILITY 70 E. Lake Street  Suite 1700  Chicago, Illinois 60601  direct: 312.332.1049  Email: [email_address] Tax Increases, Spending Caps and the FY2010 General Fund Budget in Illinois For: Campus Facility Association University of Illinois (Urbana-Champaign) UIUC YMCA 1001 S. Wright Street, Champaign, IL Presented by: Ralph Martire, Executive Director Thursday, April 14, 2011; 4:00 pm

2. Illinois’ Worst Fiscal Crises Since Great Depression The Starting Point

3. Causal Factors Flawed Tax Policy Irresponsible Fiscal practices The “Great Recession” of 2008-2009 PROPERTY TAX RELIANCE The Starting Point

4. Knowing this, Springfield Passed The Taxpayer Accountability and Budget Stabilization Act (P.A. 96-1496), which: Raises Taxes Limits Spending

5. New Annual Revenue Under P.A. 96-1496 Item New Annual Revenue to General Fund Inc rease Personal Income Tax Rate from 3% to 5% $6.05 B Increase Corporate Income Tax Rate from 4.8% to 7% $770 M Decouple from the Federal Repeal of the Estate Tax $182 * Temporarily Suspend the Net Operating Loss Carry Forward for Corporations $250 M Annual Net to General Fund $7.252 B ** * In FY2013 and FY2014, GOMB increases this estimate to $240 M. **NOTE: in FY2011 GOMB estimates the aforesaid tax increases will generate $2.88 B in new General Fund revenue.

6. Capitalist Tax Policy Should Be: FAIR  PROGRESSIVE RESPONSIVE  TO MODERN ECONOMY STABLE  DURING POOR ECONOMIES EFFICIENT  DOESN ’ T DISTORT PRIVATE MARKETS WHY DID ILLINOIS NEED A TAX INCREASE? ELEMENTS OF A SOUND AND FAIR FISCAL SYSTEM BUT ILLINOIS ISN’T

7. WHICH CREATES: STRUCTURAL DEFICIT Illinois Structural Deficit Assuming FY2000 to FY2008 Economic Conditions and FY 2000 Balanced Budget Appropriation (adjusted for Inflation and Population Growth)

8. That $15.9 B shortfall entering FY2012 was a real problem because……Over $9 out of $10 of G.F. are spent on: Education (k-12, plus Higher Ed) 35% Healthcare 30% Human Services 21% Public Safety 5% 91% HISTORICALLY:

9. But why’d Illinois Raise Taxes Rather than Cut Spending?

10. IS ILLINOIS PROFLIGATE? WELL - - - - - - The ongoing Deficit Problems were Not Caused by Wasteful Spending * NOTE: That after accounting for Inflation and Population Growth, the FY2011 GF of $24.94 B was 5% less than GF spending in FY1995, under Governor Jim Edgar

11. HEADCOUNT

12. Medicaid spending by Funding Source (Federal, State and Local) AS FOR HEALTHCARE, WELL…….

13. Amount by Which Illinois General Fund State Spending on Human Service Programs Falls Short of Keeping Pace with Inflationary Costs and Population Growth From FY2002 to FY2010 THE REAL IMPACT: $4.4 BILLION LOST HUMAN SERVICES

14. CORPORATE TAX RATES

15. Meanwhile, Pre-Tax Increase

16. Meanwhile, “Post-Tax Increase” Share Own-Source Revenue as a Percentage of Personal Income Increase or Decrease in IL GF Revenue Revenue if Illinois Had Equal State- Based Tax Burden as a Percentage of State Income Illinois* 8.8% Indiana 9.8% $5.5 Iowa 9.7% $5.0 Kentucky 10.7% $10.5 Missouri 7.6% ($6.7) Wisconsin 10.1% $7.2 2) Increases based on BEA 2008 Illinois Personal Income. * This overstates the actual new tax burden. Sources: IL State Own-Source Revenue Under Neighboring State Revenue Shares FY 2008 Current $ Billions After Passage of the 2011 Tax Increase 1) 2008 State and Local Revenue as a Percentage of Personal Income, Federation of Tax Administrators, updated July 19, 2010.

17. LOOKING FORWARD. . . .

18. Projected Annual Revenue Shortfalls Under Spending Caps (Current $ in Billions) Which is Funny — Because:

19. Estimated FY 2012 Revenue with Tax Increase $7.3 Billion in New Revenue from Tax Increase Which Brings us to FY2012

20. Despite Recent Tax Increase, The FY 2012 Budget has an Operating Revenue Shortfall of over $ 1 Billion But a Remaining Operating Deficit of Over $ 1 Billion

21. GRF Deficit = $7 Billion Lack of Revenue Still an Issue

22. Human Services would suffer $ 471 M (-8.7%) cut if FY 2011 $ 260 M supplemental to Human Services is passed. FY 2012 Proposed Nominal Dollar Change from FY 2011

23. Change in Proposed General Revenue Fund Appropriations to Human Service Agencies Three Agencies Provide Human Services: One agency bears all the cuts: DHS

24. In 2008 Illinois was 13 th in per capita income but 34 th in per capita human services funding Cuts in specific Department of Human Services Programs

25. Every Major Category of Real Funding for Current Public Services has been Cut Since FY 2000 FY 2012 Proposed Appropriations Compared to FY2000 Actual Appropriations Adjusted for Inflation and Population Growth ($ in Millions)

26. FUTURE PRESSURES

27. THE RAMP

28. Making up the Revenue Shortfall By Cutting Services = $ 7.3 B (or 28.3%) cut in $26 B appropriation Options

29. JOB LOSS

30. Preliminary Analysis of Illinois Senate GOP Budget Proposal They Claim : “ approximately $ 5B in spending reductions and economic expansion will allow lawmakers to restore the income tax to historic levels.” (p. 2) Our Analysis Shows : FY 12 deficit without $7.3 B tax increase was $16.0 B Existing state revenue barely covers current general funds Expenditures – even with the tax increase $5B in cuts are not a replacement for $7.3 B in increased revenue and not enough to pay back $16 B in accumulated deficit. Divorced from Reality

31. Proposed Reforms Do More Harm Than Good Preliminary Analysis of Illinois Senate GOP Budget Proposal They Propose: $1.3 B savings from Medicaid cuts by shifting costs to recipients and reducing eligibility “to bring Medicaid eligibility into line with the National Average” (p. 10) Resulting in: the State forgoing $650 M in federal matching funds, reducing budget savings doubling the health care impact of these cuts to vulnerable Illinoisans.

32. Proposed Reforms Do More Harm Than Good Preliminary Analysis of Illinois Senate GOP Budget Proposal They Propose: more $1.35 B “targeted savings” from pension cuts (in addition to the savings already targeted from the 2009 pension changes for future workers) Our Analysis Finds: Their pension cuts would reduce pension benefits for existing state workers in direct violation of the state constitution

33. Preliminary Analysis of Illinois Senate GOP Budget Proposal Proposed Reforms Do More Harm Than Good They Propose: state funding for K-12 education be cut by $725 M Our Analysis Finds: Their education cuts would increase the funding gap for an “adequate education” t o above its current $2000 per child.

34. CUT EDUCATION —REALLY? $ Difference in Per Pupil Foundation Level Funding EFAB vs. ACTUAL

35. Cut Education—Really?  Illinois ranks 49 th out of 50 states in portion of education funding covered by the state But Education now matters more than ever to economic prosperity:  Generally: unemployment rates are highest for those with the least education. EXHIBIT “A” IS EDUCATION

36. Cut Education — Really? Impact of Education on Wages In real (2006) dollars, between 1980 and 2006, only those with at least a college degree experienced any gain in hourly income, with growth of 14.3% Real median hourly wages for all other education categories declined Less than a high school diploma fell by ( -28.7% ) Only a high school education declined ( -8.7% ) Some college but no degree declined ( -4.3% ) You gotta learn to earn! WAGE DIFFERENCES

37. Illinois GDP Growth Lags THE ILLINOIS ECONOMY Source: Bureau of Economic Analysis, US Dept. of Commerce

38. Wages for Minorities lag Whites Real wages for Whites increased modestly between 1980 and 2007, but : The White-Hispanic wage gap is larger in amount, but increased by a smaller percentage, growing from $3.82 in 1980 to $5.34 in 2007, an increase of 39.7% over 1980 Real wages for African-Americans declined. The hourly wage gap between Whites and African-Americans grew from $1.52 in 1980 to $3.44 in 2007, an increase of 126.3% over 1980 WAGE DIFFERENCES

39. Still Separate. . . . Illinois is the third most segregated state in K-12 education for blacks 82% of black children attend majority/minority schools 90% of white children attend virtually all white schools (*Source: 2006 Education Trust study on segregation) SEGREGATION

40. . . . . Still Unequal Minority school districts start out with $1,154 less per child to spend on education That’s the second worst gap in the nation (*Source: 2006 Education Trust study on segregation) SEGREGATION

41. “ THE BURDEN IS TOUGH” *NOTE: It’s a fixed cost for business as well.

42. Other Proposed options : Borrowing from financial institutions to pay overdue bills and cover operating costs Continued deferment of payments owed providers Further cutting FY2012 appropriations for services Raising Revenue: Expanding sales tax to services. taxing some retirement income a progressive income tax. Options

43. For More Information: Center for Tax and Budget Accountability www.ctbaonline.org Ralph M. Martire Executive Director (312) 332-1049 [email_address] Ron Baiman, Ph.D. Director of Budget and Policy Analysis (312) 332-1480 [email_address] Yerik Kaslow Research Associate (312) 332-2151 [email_address] Further Information