Presentation on theme: "Illinois Needs a “Fair Tax”"— Presentation transcript:
1Illinois Needs a “Fair Tax” Introduce yourself, CRS, and the Fair Tax campaignReplacing the Flat Tax With a Graduated State Income Tax
2FLAT TAX RATE HURTS THE POOR The 2% tax increase had to be paid by everybodyEven with the tax increase many programs have had to be cut
3What’s Wrong with Illinois’s Tax System? UNFAIRINEFFICIENTINADEQUATEThere are 3 things wrong with our state tax system:It’s unfair: the poor are paying more of their income in taxes than the wealthyIt’s inefficient: it does not capture income growth and does not keep up with rising costsIt’s inadequate: it doesn’t generate enough revenue to keep our state runningLet’s start with unfair as it appeals most to our values as Christians and Jesus’ clear compassion for the poor in the Gospels.
4Who has benefitted from economic growth? It stands to reason that a state with an overall regressive tax system may have a budget shortfall. After all, it means they are relying too heavily on the bottom income groups and not enough on the top income groups.But when we also take into consideration how wages have changed across income groups over the past 30 years, the story gets worse. As you can see, the bottom 60% of earners are all making less than their counterparts 30 years ago. On the other hand, those in the top 30% have all seen an increase in their annual income—including a 23% increase for those in the 90th percentile. This means that income is shifting out of the bottom income groups—where effective tax rates are higher—and into the top income groups—where effective rates are lower.This dramatic shift in income distribution is a social issue unto itself. However, it also exacerbates our tax problems. Placing a higher tax burden on income groups for whom income is shrinking and a lower tax burden on those income groups for whom income is growing is a recipe for a budget shortfall
5Our Current Income Tax Structure Let’s talk more specifically about income taxes…Here is how our state income tax burden is distributed under the current 5% flat rate. As you can see, for those who make between $9-150K, the income tax is very marginally progressive even though everyone has the same stated rate of 5%. That’s because of deductions, offsets, credits, and exemptions.However, the effective rates for those making over $150K starts to flatten out and then fall pretty dramatically. At the very top, the effective income tax rate for those households earning $1,000,000 and above is 2.1%...which is the same rate as those making $3,000-5,000, or a bit more than half the average rate for Illinois earners. To put it another way, a family making $15,000 a year currently pays a higher rate than one making $1.5 million, and another family making $35,000 pays a higher rate than one making $350,000.[IF someone asks about total $ paid:Total income tax revenue is roughly $15 billion/yearMillionaires (0.48% of the IL population) pay $2.8 billion, or about 18.5% of that.]
6The Tax Burden for the Top 1% in Illinois is 2 to 3 Times Less How is the tax burden distributed?(Presenter: Explain the table left to right, top to bottom)These tax figures are calculated as “effective” tax rates. That means they measure the percentage of a household’s total annual income that is spent on a particular tax in a given year. The population is broken down into categories of income earners, moving from the poorest 20% on the left to the wealthiest 1% on the right.Sales/excise taxes are—not surprisingly—the most regressive. Those in the bottom 20%, for example, where the average income is $10,100, don’t really make enough to save, so they spend every last dollar they make. As such, almost all of their income will be subject to sales tax and thus they spend a much higher proportion of their income on sales tax.You may, however, be surprised to find out that property taxes are also regressive. Even though property taxes are ad valorem tax—that is, an individual’s property tax is calculated based on the value of her property, the assessment ratio, and local property tax rate—and those with more wealth are obviously more likely to have property (and more expensive property), those in the upper income groups still enjoy a lower effective property tax rate on average because of the unequal distribution of wealth.Income taxes are very marginally progressive—because of tax deductions and credits—but not nearly enough to offset the other state and local taxes.So, overall, we have a state tax system that taxes the poorest 20% at an effective rate of 13.7% and the top 1% at an effective rate of 5.3%Overall Effective Tax Rates by Income Group:2007 (3%): 13.0% 11.0% % % % 7.2% 4.9%2012 (5%): 13.7% 12.3% 12.0% 11.4% 10.7% 8.9% 6.5%
7Because Illinois Taxes are Unfair, They are Inefficient Let’s look at our near future. This is our fiscal outlook if we do not make any changes…this is what economists call a “growing structural deficit.”The blue indicates spending through 2025 if we simply maintain our current levels of state services—that is, no major cuts or additions in spending. The steady increase is attributed to population growth and inflation.The red line indicates our revenue. The steep drop in is due to the scheduled income tax rate decrease to 3.75%. The gradual increase in the following years is again due to population growth and inflation. But the drop we just barely begin to see happening on this chart in 2025 is once again because of the second scheduled decrease in the income tax rate, when it drops down to 3.25%.In other words, if we leave our tax policy as is and we continue our current funding levels, our deficit—and consequently our debt—will grow out of control. The gap between our revenue and our spending will continue to grow wider and wider.How bad could it get? The Institute for Illinois’ Fiscal Sustainability recently reported that, “Given rising Medicaid and pension costs and the scheduled partial sunset of the income tax increase, Illinois’ unpaid bills could rise to $34.8 billion by the end of FY2017.”There are really two possible solutions to this deficit: increase revenue or cut spending.And we’re about to talk about why we can’t cut our way out of this mess.1. Fails to Capture Income Growth2. As fixed costs rise (healthcare, education, etc.) the revenue lag creates a “structural deficit.”
8FACT: Over $9 out of $10 of the General Funds are spent on 4 core services: EDUCATION (preK through higher ed.) 35%HEALTHCARE %HUMAN SERVICES % PUBLIC SAFETY %91%So back to the budget cutting solution…There is a perception that our state government wastes much of its money on unimportant programs and services, and that we can simply “fix” our state by cutting this waste. However, $9 out of every $10 of the General Funds are spent on four core services.Maybe we can spend some of our money more efficiently in these core areas, but we can’t afford to significantly cut the budgets of these core public services as we have over the past several years.But it’s not just Democrats saying this. Senate Republican Leader Christine Radogno recently said, "I don't know that there's tons left to cut. Certainly there's things we can still do to make things more efficient, there's always that potential, but nothing that will equate to the size of the pension problem."
9How Much have we Cut? Category 2013 ($ Millions)2000 Adjust for Inflation & Pop Growth$ Diff FY2013 –FY2000 Adjust for Inflation & Pop Growth% ChangeNet Public Services excluding Pensions and Group Health$23,539$30,915-$7,376-23.86%P-12$6,542$7,464-$922-12.35%Higher Ed$1,980$3,315-$1,335-40.28%Healthcare (excluding Group Health)$6,852$8,934-$2,082-23.30%Human Services (excluding all Healthcare)$4,749$7,086-$2,337-32.98%Public Safety$1,606$2,081-$475-22.82%Sources: FY 2013 Budget as passed in HR 706, SB2348, SB2413, SB2443, SB 2454, SB2474, SB 2332, SB2378, SB2409, and June 2012 Communications with Legislative staff.Furthermore, cutting hasn’t worked thus far to completely solve our problems.Over the past 13 years, state spending has been significantly cut across the board. Again, I know this is a lot of data on one page, but the most important column is that last one on the right, which shows the decrease in spending by percentage points in each of these four core areas we just discussed.The cost of cuts:The biggest cuts have been to human services and education.Let’s take a closer look at how these cuts affect our public education system.
10Local and State Share of Education Funding Spending So what happens when education funding is consistently cut at the state level?The cost is shifted to local school districts. Some districts, particularly those with higher property values, are able to cover the increasing costs of education when the state can’t provide enough funding. However, many school districts cannot afford to cover the difference, and consequently there is less funding per student.Illinois is 47th out of the 50 states in terms of state funding for education. As you can see, Illinois pays barely more than a quarter of the cost for sending a child to school, whereas the average state covers nearly half of that cost.This directly affects the local share. Local districts in Illinois cover more than 60% of the cost on average, opposed to the average U.S. state in which the local districts shoulder only 43.7% of the cost.The FY2012 budget proposal also shows that the state continues to fall further behind in funding an adequate education with a 4% cut. The nonpartisan Education Funding Advisory Board (EFAB) reviews education costs each year and then recommends the minimum, per pupil “Foundation Level” of K-12 spending required to provide a basic, adequate education. In FY2003, the state’s actual Foundation Level was $120 less than the EFAB recommendation. The Foundation Level established in the FY2012 budget, however, is $2,241 less than the EFAB recommendation. We are no longer even making an attempt to invest properly in our children at the state level, despite the fact that our constitution declares that the state has primary responsibility for funding education.Source: National Center on Education Statistics, “Revenues and Expenditures for Public Elementary and Secondary Education: School Year (Fiscal Year 2009).”
11And the Income Tax Increase Expires in 2015 Rate Structure ChangeIn 2015, the personal income tax rate drops from 5% to 3.75%In 2025, the personal income tax rate drops from 3.75% to 3.25%Revenue ImpactIn 2015, along with reduction in the corporate tax rate, this will result in a loss of...If the emergency tax increase to 5% wasn’t really sufficient to solve our debt problem in the first place, how much worse will it get when the tax increase partially expires in 2015? And then in 2025 when the rate drops almost all the way back down to the 3% flat rate that got us in so much trouble to begin with?The $4B in revenue loss we can expect in 2015 is very significant…it’s about 12% of this year’s budget.So what’s the solution?$4 billion
12What’s The Solution?How Can We Make Illinois Taxes More Fair, More Efficient, and Fiscally Sustainable?
13Graduated Income TaxMakes the system more fair; account for a person’s ability to payHelps repair the state budget long termSpurs the economy by putting money back in the pockets of middle and low-income IllinoisansMakes the system more fair: pay based on your income levelHelps repair the state budget long term: fix our structural deficit so we’re not spending more than we’re taking inSpurs the economy…: Marginal Propensity to Consume; AND less cost in basic human services for the poor if they are keeping more of their income
14Most Other States Have Graduated Rates Federal Income Tax Rates are Graduated35 of the 42 States with Income Taxes have Graduated RatesOur Neighbors:Iowa: 9 Rates (0.36% to 8.98%)Kentucky: 6 Rates (2.0 to 6.0%)Missouri: 10 Rates (1.5% to 6.0%)Wisconsin: 5 Rates (4.6% to 7.75%)All of our conservative neighbors (except Indiana) have graduated income taxes, and all are in better fiscal shape than Illinois.
15A Specific Proposal No tax on first $5,000 5% tax rate up to $100,000 11% over $1,000,000
16Graduated Rates Could Mean that Most Illinoisans Would Pay Less This chart presents one tax model, demonstrating how income taxes could change for each income group from the current flat tax.Exempt the first $5,000 of every tax household’s incomeTHIS means that those making less than $5,000 do not owe any income taxes…in fact, after tax credits and deductions, the average household making less than $11,000 would not owe any income taxesLeave the stated income tax rate at 5% for any household making less than $100,000 per yearTHIS means that even though every household making between $5-100K/year would be paying the same 5% rate they do now, because their first $5K of income is exempted, their effective tax rates will go down…in other words, most every household making less than $100K (and even many of those making between $ K) would receive an income tax cut (that’s 94% of households)Raise the stated rates of those making over $100,000 as follows:Even though some of the stated marginal tax rates are much higher than the current 5% rate, effective tax rates will not increase at the same proportion. For example, for those making between $ K, their stated tax rate has doubled from 5-10%, but their effective tax rate—again, because of tax credits and deductions—has increased only half that much—from 4%-6%.As you can see, income taxes would decrease for the average person making anything less than $150K—94% of all taxpayers.(Even though some of the stated tax rates are much higher than the current 5%, effective tax rates will not increase at the same proportion.)(Presenter: Defer specific questions about this model. Stress that this is simply an example to show that we could raise overall state revenue while decreasing taxes for the vast majority—94% in this case—of taxpayers)(Center for Budget and Tax Accountability, January 2012)
18Preamble of Illinois’ Constitution We, the People of the State of Illinois - grateful to Almighty God for the civil, political and religious liberty which He has permitted us to enjoy and seeking His blessing upon our endeavors - in order to provide for the health, safety and welfare of the people; maintain a representative and orderly government; eliminate poverty and inequality; assure legal, social and economic justice; provide opportunity for the fullest development of the individual; insure domestic tranquility; provide for the common defense; and secure the blessings of freedom and liberty to ourselves and our posterity - do ordain and establish this Constitution for the State of Illinois.So if changing from a flat rate to a graduate income tax seems to make so much sense, why don’t we just do it?Even the preamble from our constitution seems to support a more equitable and progressive income tax…Anybody know why it’s not that easy?
19Change requires a constitutional amendment Current Illinois Constitution:Article IX -- RevenueSection Limitation on Income Taxation(a) A tax on or measured by income shall be at a non-graduated rate.
20Constitutional Amendment Process 1. Constitutional amendments can only be placed on the ballot in November with approval by 60% of the General Assembly (71 votes in the House and 36 votes in the Senate)2. Referendum in November must be approved by 60% of votersWe need to win both voter approvaland legislative supportHow do we change the Constitution?
21Four Phase Plan: Build Momentum and Educate our Communities Win Legislative Approval (January to May 2014)Win Voter Approval (May 2014 toNovember 2014)4. Propose and Pass Fair Tax BillThree Phases of the campaign:1. Educate our communities2. Pass a bill through both houses with 60% in each (by May 2014)3. 60% of voters (in November 2014)Fourth phase will be instituted a rate structure
22Our Voices Have to Be Heard Our stories have to be told
23FIRST: Endorse the Campaign Next Steps – The Path to VictoryFIRST: Endorse the CampaignThen educate,energize, organize and mobilize!