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