CENTER FOR TAX AND BUDGET ACCOUNTABILITY 70 E. Lake Street Suite 1700 Chicago, Illinois direct: Prepared for the League of Women Voters Fair Tax for Illinois Graduated Rate Income Tax © 2012, Center for Tax and Budget Accountability

The Problem (General Fund) © 2012, Center for Tax and Budget Accountability

CategoryFY 2013 Actual (i)Projected FY2013 Revenue$33.72 (ii)FY2013 Hard Costs$9.32 (iii)Deficit Carry Forward from FY 2012$9.00 (v)General Fund Service Appropriations in Enacted G.F. Budget (Net of “Unspent Appropriations”) $23.54 (vi)Minimum FY2013 General Fund Deficit($8.14) (vii)Deficit as a Percentage of General Fund Service Approps-34.6% Sources: FY2013 Budget as passed in HR706, SB2348, SB2413, SB2443, SB2454, SB2474, SB2332, SB2378, SB2409, and June 2012 Communications with Legislative staff; Revenue from Amendment No. 1 to HR707 adopted March 1, 2012, and Senate Floor Amendment No. 1 to SR 586 adopted March 7, 2012; and unpaid bills from April 2012 Quarterly Report from the Comptroller. The Problem © 2012, Center for Tax and Budget Accountability FY 2013 Accumulated Deficit ($ Billions)

5 Points for Fair Tax in Illinois Illinois cannot fix it’s problem with cuts ALONE. The problem can be solved with comprehensive tax reform. Illinois residents should be taxed fairly to keep up with a modern economy. A graduated income tax will NOT hurt the economy but will actually help it. This CAN happen. © 2012, Center for Tax and Budget Accountability

Illinois cannot fix its problem with cuts alone. Over $9 out of $10 of General Fund are spent on: Education (PreK-12 plus Higher Ed)35% Healthcare30% Human Services21% Public Safety 5% 91% © 2012, Center for Tax and Budget Accountability

Illinois cannot fix its problem with cuts alone. Significant decline in spending since 2000 when adjusted for Inflation and Population Growth ($ Millions) CategoryFY2013 Enacted FY2000, Enacted Adj for Infl (ECI) & Pop Growth $ Diff FY2013 – FY2000 Adj (ECI & Pop Growth) % Change Net Public Services excluding Pensions and Group Health $23,539$30,915-$7, % P-12 $6,542$7,464-$ % Higher Ed $1,980$3,315-$1, % Healthcare (excluding Group Health) $6,852$8,934-$2, % Human Services (excluding all Healthcare) $4,749$7,086-$2, % Public Safety $1,606$2,081-$ % 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. © 2012, Center for Tax and Budget Accountability

Illinois cannot fix its problem with cuts alone Local and State Share of Education Funding Spending Source: National Center on Education Statistics, “Revenues and Expenditures for Public Elementary and Secondary Education: School Year (Fiscal Year 2009).” © 2012, Center for Tax and Budget Accountability

Illinois cannot fix its problem with cuts alone Education related to Unemployment… © 2012, Center for Tax and Budget Accountability

 Employer-provided health insurance benefits have been steadily declining in Illinois since  By 2010, 56% of families with at least one member working full time did not have employer-provided insurance.  By 2010, 32% of the Illinois population was either on Medicaid or uninsured. Illinois cannot fix its problem with cuts alone. As for cutting Health Care well… © 2012, Center for Tax and Budget Accountability

Illinois cannot fix its problem with cuts alone. Health Care Spending, since FY2000, Adjusted for Inflation and Population ($ Millions) CategoryFY2000 Enacted FY2000 Infl& Pop Adj to FY2013 FY2013 Enacted% Diff FY2013 GOMB & FY2000 Adj Healthcare (including Medicaid, DHFS and DPH, but excluding Group Health Insurance) $5,022$8,934$6, % Sources: Unadjusted historic appropriations from Governor’s Final Budget Summary for FY2000; FY 2013 Enacted for Medicaid from SB 2454 and as reported by Senate staff, June FY 2013 appropriation for “Other Healthcare” of $ million is based on SB2454 DPH and DHFS appropriation minus Medicaid. FY 2012 Healthcare (net of Group Health) is sum of these. Health Care spending inflation adjusted using the Midwest Medical CPI. © 2012, Center for Tax and Budget Accountability

Illinois cannot fix its problem with cuts alone. What does Human Services Cover? Mental Health Services Developmental Disabilities Caring for Seniors Childcare for Single Working Parents Domestic Violence Prevention/ Treatment Caring for Abused and Neglected Children Substance Abuse and Alcoholism Services © 2012, Center for Tax and Budget Accountability

5 Points for Fair Tax in Illinois Illinois cannot fix it’s problem with cuts ALONE. The problem can be solved with comprehensive tax reform. Illinois residents should be taxed fairly to keep up with a modern economy. A graduated income tax will NOT hurt the economy but will actually help it. This CAN happen. © 2012, Center for Tax and Budget Accountability

The problem can be solved with tax reform. Tax Policy Should Be: FAIR  PROGRESSIVE RESPONSIVE  TO MODERN ECONOMY STABLE  DURING POOR ECONOMIES EFFICIENT  DOESN ’ T DISTORT PRIVATE MARKETS ILLINOIS IS 0 for 4 © 2012, Center for Tax and Budget Accountability

The problem can be solved with tax reform. Primary Causal Factors of IL Financial Woes: Flawed Tax Policy Irresponsible Fiscal practices NOT The “Great Recession” of © 2012, Center for Tax and Budget Accountability

Marginal v. Effective Tax Rate The marginal tax rate is the rate applied to your taxable income, that is after all deductions, etc. for a specified range of income. The effective tax rate is the percentage of your taxable income you actually pay in income taxes, across all marginal tax brackets and after all credits and deductions. © 2012, Center for Tax and Budget Accountability

The problem can be solved with tax reform. Our flawed tax policy: Effective Tax Rates By Base Income Under Illinois’ Current 5% Flat Tax © 2012, Center for Tax and Budget Accountability

Source: COGFA, “A Report on the Financial Condition of the IL State Retirement Systems: Financial Conditions as of June 30, 2011,” p. 95. The problem can be solved with tax reform. Irresponsible Practice –Required, partly from unpaid past, State Pension Contributions FY2013 – FY2045 © 2012, Center for Tax and Budget Accountability

The problem can be solved with tax reform. Future Options : Borrowing from financial institutions to pay overdue bills and cover operating costs Continued deferment of payments owed providers Further cutting appropriations for services Raising Revenue:  Expanding sales tax to services.  Taxing some retirement income.  A GRADUATED RATE INCOME TAX. © 2012, Center for Tax and Budget Accountability

The problem can be solved with tax reform. Tax Rates by Base Income with Graduated Income Tax (Possible GRIT scenario) © 2012, Center for Tax and Budget Accountability

The problem can be solved with tax reform. Potential Effective Tax Rate Changes in Illinois with Graduated Individual Income Tax Structure Scenario © 2012, Center for Tax and Budget Accountability

5 Points for Fair Tax in Illinois Illinois cannot fix it’s problem with cuts ALONE. The problem can be solved with comprehensive tax reform. Illinois residents should be taxed fairly to keep up with a modern economy. A graduated income tax will NOT hurt the economy but will actually help it. This CAN happen. © 2012, Center for Tax and Budget Accountability

Illinois residents should be taxed fairly to keep up with a modern economy. Illinois State & Local Taxes Paid as a Share of Family Income for Non-Elderly Taxpayers © 2012, Center for Tax and Budget Accountability

Source: Piketty and Saez, “Striking it Richer: The Evolution of Top Incomes in the United States (Update with 2007 estimates),” August 5, 2009, U.C. Berkeley; Calculations from John Schmidt, Challenge, September-October Distribution of US Income Growth Over Time Families1979 — 2007 Top 10%63.70% Bottom 90%36.30% Distribution of US Income Growth Over Time Families1947— 1979 Top 10%34.10% Bottom 90%65.90% © 2012, Center for Tax and Budget Accountability Illinois residents should be taxed fairly to keep up with a modern economy. Income distribution has changed…

Illinois residents should be taxed fairly to keep up with a modern economy. Sooo…. Despite being Big ‘N Rich In 2011, Illinois ranked fifth nationally with a Gross State Product in excess of $671 billion (BEA). That would be the 19 th largest economy of any nation in the world-greater than Egypt, Saudi Arabia, Colombia, Belgium, Sweden, Greece, Ireland, Portugal, Norway and Nigeria, to name a few. © 2012, Center for Tax and Budget Accountability

Illinois residents should be taxed fairly to keep up with a modern economy. Illinois GDP Growth has Lagged Long-term Source: Bureau of Economic Analysis, US Dept. of Commerce GDP Growth © 2012, Center for Tax and Budget Accountability

Illinois had the second lowest real GDP Growth in the entire Midwest in 2010 Real GDP Growth 2010 Indiana4.6% Iowa3.1% Michigan2.9% Wisconsin2.5% Ohio2.1% Illinois1.9% Missouri1.4% National and Midwest Average was 2.6 % Illinois residents should be taxed fairly to keep up with a modern economy. © 2012, Center for Tax and Budget Accountability

5 Points for Fair Tax in Illinois Illinois cannot fix it’s problem with cuts ALONE. The problem can be solved with comprehensive tax reform. Illinois residents should be taxed fairly to keep up with a modern economy. A graduated income tax will NOT hurt the economy but will actually help it. This CAN happen. © 2012, Center for Tax and Budget Accountability

GRIT will not hurt the economy but will actually help it. Hurting the private sector with job losses because of state budget cuts © 2012, Center for Tax and Budget Accountability

Graduated Rate Income Tax will not hurt the economy but will actually help it From : 9 states with highest graduated income tax rate structures had:  Better growth in state GDP per capita  Better change in median wage  Identical unemployment rate Than the 9 states with NO income tax Source: Institute on Tax and Economic Policy © 2012, Center for Tax and Budget Accountability

GRIT will not hurt the economy but will actually help it. Total State and Local Tax As a Percentage of Income 2010 Midwest States %National Rank Indiana16.6%17 th Iowa17.0%10 th Michigan16.69%12 th Wisconsin16.6%16 th Ohio16.1%26 th Illinois14.2%42 nd Missouri13.5%47th Illinois has the second lowest total state and local tax burden as a percentage of income (AND the second lowest GDP growth.)

5 Points for Fair Tax in Illinois Illinois cannot fix it’s problem with cuts ALONE. The problem can be solved with comprehensive tax reform. Illinois residents should be taxed fairly to keep up with a modern economy. A graduated income tax will NOT hurt the economy but will actually help it. This CAN happen. © 2012, Center for Tax and Budget Accountability

This CAN happen… GRIT can

This CAN happen ARTICLE IX – Revenue Section 3. LIMITATIONS ON INCOME TAXATION (a) A tax on or measured by income shall be at a non-graduated rate.

1. Constitutional amendments can only be placed on the ballot by 60% of the General Assembly approving (71 votes in the House and 36 votes in the Senate) 2. Referendum must be approved by 60% of voters Need to win both legislative support and voter approval This CAN happen Constitutional Amendment Process

Remember Illinois cannot fix it’s problem with cuts ALONE. The problem can be solved with comprehensive tax reform. Illinois residents should be taxed fairly to keep up with a modern economy. A graduated income tax will NOT hurt the economy but will actually help it. This CAN happen © 2012, Center for Tax and Budget Accountability

For More Information: Center for Tax and Budget Accountability Ralph M. Martire Executive Director (312) Jennifer Lozano Research Associate (312) © 2012, Center for Tax and Budget Accountability