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Department of Revenue projection slammed as “absurd”

Wednesday, May 4, 2016

* From the Illinois Department of Revenue’s analysis of HB 689, Rep. Lou Lang’s graduated income tax bill

Dynamic analysis: For this part of the fiscal policy scoring we used the Regional Economic Models Inc. software (REMI). The static estimate of $1.76 billion in additional tax revenue is used as a starting point of the dynamic analysis.

In REMI modeling; balance budget feedback was suppressed. The reason is that the revenue estimate is insufficient to balance the state budget, much less allow for additional spending. Therefore, the logic of an increase of government spending offsetting the negative effects of a tax increase, does not apply.

The increase in the tax rate for persons in the higher income tax bracket, results in a decrease in the incentive to work for individuals in that tax bracket. Moreover, the increase in the tax rate results in such pronounced negative economic effects because this rate will also affect pass-through entities (small business income).

Some of the tax increase will be absorbed by a decrease in personal income or business profits. Some other fraction of the tax increase will be translated into price increase (compared to the rest of the nation). Consistent with empirical studies, REMI simulation shows a decline in population and labor force as a reflection of increased out-migration. Employment decreases compared to a baseline scenario (do-nothing scenario) due to the loss of competitive advantage with respect to other states with lower tax burden.

After accounting for the negative effect on the economy and other revenue sources, the net Revenue increase is $1.64 Billion (instead of the static estimate of $1.76B). Other revenue sources that decline are: Individual income tax $38.3 Million, Corporate Income Tax $7.0 Million, Sales Tax $50.5 Million, Gambling Taxes and Lottery $3.3 Million, Other Taxes (Estate, Public Utilities and Motor Fuel Taxes) $11.6 Million, Federal Revenue (reduced demand for federally matched programs due to increase in out-migration) $7.8 Million.

After 14 years of implementation of this tax policy (year 2030) the main economic effects of this tax policy are:

    · Disposable Personal Income decreases $2.8 Billion per year compared with the baseline scenario (current conditions and economic trend).

    · Real Gross Domestic Product of the state decreases $1.7 Billion compared with the baseline scenario (current conditions and economic trend).

    · Total Employment decreases almost 18,000 jobs compared with the baseline scenario (current conditions and economic trend).

    · Population and Labor Force decrease compared with the baseline scenario (current conditions and economic trend). This is a result of increased out-migration due to higher tax burden.

* From Emily Miller…

Hi Rich,

As part of an ongoing effort to kill efforts to achieve tax fairness in Illinois, the Department of Revenue issued a “summary of fiscal impact” on the fair tax proposal in Representative Lang’s HB689, a bill that would have provided a tax cut to 99.3% of all Illinois taxpayers, and provide an additional $1.9 billion in revenue.

Unfortunately for Illinois taxpayers, the governor’s anti-fairness narrative seems to have taken hold, and the result is that neither Representative Christian Mitchell’s fair tax constitutional amendment or Leader Lang’s tax cuts had the bi-partisan support they needed to pass.

The model the Department of Revenue used to disparage the fair tax plan is deeply flawed, highly speculative and subject to manipulation. You can find ITEP’s take on the analysis here: http://itep.org/itep_reports/2016/05/statement-itep-statement-on-illinois-department-of-revenue-analysis-of-house-bill-689.php#.Vyo35qgrI2y

Now that they’ve closed the door on a fair tax, where those who make less pay a lower rate and those who make more pay a higher rate, lawmakers and the Governor will have no choice but to raise the flat income tax, and will need to incorporate tax fairness measures like increasing the earned income tax credit and adding a targeted child tax credit to help low and middle income families who will be most impacted.

We look forward to working with everyone to create a responsible budget that invests in children, families and communities across Illinois.

Emily Miller
Policy and Advocacy Director, Voices for Illinois Children

* From that ITEP link

“The Illinois Department of Revenue’s analysis of House Bill 689 is fatally flawed for one simple reason: it assumes that the $1.76 billion in new personal income tax revenue that would be raised under HB689 cannot help to fund any government services. The DOR analysis notes that because this $1.76 billion would be ‘insufficient to balance the state budget, much less allow for additional spending… the logic of an increase of government spending offsetting the negative effects of a tax increase, does not apply.’

“This argument is absurd. When lawmakers make the difficult decision to raise new tax revenues, those revenues are always used to shore up public investments. Whether it’s to reinforce education spending, build roads, or provide better health care, these investments have a lasting, positive effect on the quality of life of Illinois citizens and the infrastructure on which the state’s businesses rely.

“If any member of the state legislature took a $20 bill out of their wallet and set fire to it, they would obviously be worse off for having done so. On a much larger scale, this is essentially what the Department of Revenue’s analysis is asserting would be done with the $1.76 billion raised under HB 689.

“Dynamic revenue analysis is notoriously difficult—and notoriously manipulable. The hallmark of a sensible dynamic analysis is that it acknowledges the positive economic effects of public investments. By this standard, the DOR’s analysis fails utterly.”

* Indeed, there are issues with dynamic revenue analysis. Governing Magazine questioned the validity of this process

Policy staff in least 21 states — and possibly many more — have experimented with dynamic scoring since the early 1990s. While many states regularly use dynamic models to assess the economic impact of infrastructure investments, almost all state-level efforts to dynamically score tax policies have been abandoned. The primary culprits: wildly unrealistic expectations of revenue changes and serious problems using a highly imprecise policy tool in a balanced-budget environment. […]

Kansas’ recent experiment with dynamic scoring is a case in point. In 2012, Kansas adopted major reductions in its income tax. In fiscal year 2015, the state economist’s static estimate forecast that revenues from the 2012 tax changes would decline from $6.466 billion to $5.642 billion (an $824 million loss or 13 percent). However, a dynamic analysis from a pro-tax-cut research institute predicted that the state would actually lose only $714 million. That analysis forecast that $110 million, or 13.5 percent, in additional revenues would be recovered through dynamic effects.

Kansas, of course, is now dealing with a horrible deficit.

* Related…

* RBC Statement: Failure to Consider Fair Tax Irresponsible, But Many Revenue Options Remain to Fix State Budget Crisis

- Posted by Rich Miller        

22 Comments
  1. - John Rawls - Wednesday, May 4, 16 @ 1:29 pm:

    Wouldn’t surprise me if the GA did the equivalent of lighting money on fire


  2. - Scamp640 - Wednesday, May 4, 16 @ 1:36 pm:

    Kansas, AKA Brownbackistan


  3. - Mouthy - Wednesday, May 4, 16 @ 1:46 pm:

    Of course the report is bogus because, IMO, that’s the way Rauner wanted it…


  4. - Norseman - Wednesday, May 4, 16 @ 1:52 pm:

    Flaw analysis? Yes. Does it matter? No.

    Politically, the amendment is dead. Too many politicians are worried about their careers and not at what needs to be done to straighten out the State’s finances.


  5. - AC - Wednesday, May 4, 16 @ 2:02 pm:

    So, now what? We’re at the bottom of a hole and it’s only getting deeper. Digging ourselves out would be a challenge if there were the political will. Without the political will, I don’t have much hope.


  6. - Downstater - Wednesday, May 4, 16 @ 2:10 pm:

    This is the same Department of Revenue that misallocated the Personal Property Replacement Tax (PPRT) Fund to the tune of $168 million. Does anyone have confidence in the abilities of this agency?


  7. - Bigtwich - Wednesday, May 4, 16 @ 2:10 pm:

    If an increase in the tax rate for persons in the higher income tax bracket, results in a decrease in the incentive to work for individuals in that tax bracket does a decrease in the tax rate for the other 99.3% of the population result in an increase in the incentive to work for those individuals?


  8. - Annonin' - Wednesday, May 4, 16 @ 2:26 pm:

    Yikes. And the BIgBrains were sayin’ this was really a true fact, rock solid, iron clad analysis that proves the 1%ers cannot spend a dime more.


  9. - anon - Wednesday, May 4, 16 @ 2:33 pm:

    Bigtwich - Wednesday, May 4, 16 @ 2:10 pm:

    If an increase in the tax rate for persons in the higher income tax bracket, results in a decrease in the incentive to work for individuals in that tax bracket does a decrease in the tax rate for the other 99.3% of the population result in an increase in the incentive to work for those individuals?

    The increase for the CEO of Boeing would be about $1.7 million; the decrease for the family doing ok at $50,000 will be $125.


  10. - walker - Wednesday, May 4, 16 @ 2:44 pm:

    At least for now, trust only COGFA on such forecasts. Despite great pressures they are still not politicized.


  11. - Reme - Wednesday, May 4, 16 @ 2:47 pm:

    I thought at a press conference yesterday morning, Ms. Miller said the legislation did have the bipartisan support necessary to pass? Guess not.


  12. - Sir Reel - Wednesday, May 4, 16 @ 2:48 pm:

    I feel bad for the State employee that was assigned this “task.” I’m sure his or her suggestions, input and concerns were taken into consideration. Not.


  13. - Emily Miller - Wednesday, May 4, 16 @ 3:00 pm:

    Reme - Wednesday, May 4, 16 @ 2:47 pm:

    –I thought at a press conference yesterday morning, Ms. Miller said the legislation did have the bipartisan support necessary to pass? Guess not.–

    Unfortunately for Illinois taxpayers, after many Republican lawmakers expressed their intention to support the measure, at the urging of the Governor Republican lawmakers made the decision to oppose the fair tax.


  14. - Ahoy! - Wednesday, May 4, 16 @ 3:11 pm:

    I believe REMI’s projections are conservative and the financial looses would actually be worse but it’s hard to model human behavior and tax policy. There is always the possibility that rich mobile people will stay when they can save so much more money by moving.


  15. - Handle Bar Mustache - Wednesday, May 4, 16 @ 3:41 pm:

    Emily,
    Hopefully in the coming days those members are called out by name. Voters should know.


  16. - Natalie - Wednesday, May 4, 16 @ 3:47 pm:

    I take exception to the statement that the REMI model is flawed. The REMI model is the most well respected economic impact tool on the market - and has been peer reviewed in the literature for decades.


  17. - Whatever - Wednesday, May 4, 16 @ 4:01 pm:

    Ahoy! @ 3:11 –
    ==I believe REMI’s projections are conservative and the financial looses would actually be worse but it’s hard to model human behavior and tax policy.==

    I think it would be more correct to say that it is hard to detect human responses to changes in state tax laws.


  18. - Old and In the Way - Wednesday, May 4, 16 @ 4:32 pm:

    Natalie
    Please. A careful review of the literature would suggest that these reviews are not all positive nor reassuring. There is a wide spectrum of opinion as to its validity. This is especially true in the context of states who have suffered from using its projections. Kansas and Louisiana come to mind because they are recent and ongoing. Then there are the counter examples of Minnesota and California, so please drop the widely respected stuff.


  19. - jerry 101 - Wednesday, May 4, 16 @ 7:36 pm:

    “However, a dynamic analysis from a pro-tax-cut research institute predicted that the state would actually lose only $714 million.”

    Oh, well in that…WAIT. What?

    Kansas would ONLY LOSE $714 million? And that’s so much better than losing $824 million?!?!

    So, 7/8ths of the damage was still projected to be done under the more favorable analysis? *facepalm*


  20. - Last Bull Moose - Wednesday, May 4, 16 @ 8:04 pm:

    The analysis is obviously flawed. They assume that State spending is constant with no new revenue. Current spending levels are not sustainable. No tax increases leads to a contracting economy.


  21. - Natalie - Wednesday, May 4, 16 @ 11:03 pm:

    Old and In the Way - I disagree - I have not seen a criticism of the actual structure of the REMI model itself in the academic literature. Any criticism that I am aware of is based on how the model has been used.


  22. - Delimma - Thursday, May 5, 16 @ 10:33 am:

    @Natalie - There are papers and arguments against the REMI analysis, but most of that criticism seems to critique the REMI analysis as easily manipulated to encourage “big government.”

    I have no opinion on this issue, other than to state that there are critiques out there if you look.


Sorry, comments for this post are now closed.


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