It’s not as simple as it sounds
Thursday, May 10, 2018 - Posted by Rich Miller
* From the Rauner administration’s latest “Illinois Economic and Fiscal Policy Report”…
State tax revenues will increase if Illinois’ economy grows at the national rate
* That’s obvious, but by how much? The Taxpayers’ Federation of Illinois takes a look…
According to one estimate, significant additional state revenues could be attained if Illinois improved its economic growth to just the national average….an additional $5.4 billion in state revenue over 5 years if the economy were to grow at the national average.
In examining this type of statement we first look at the relationship among Illinois’ “big three” revenue sources (the taxes that generate the bulk of our own-source revenue: individual income, corporate income and sales taxes), Illinois gross state product (GSP), and gross domestic product (GDP). Why do we do this? Well, it is important to see if GSP is a good predictor of revenue growth in the first instance before considering what would have occurred if Illinois GSP had grown at the same rate as national GDP (the standard measure of national economic growth).
Figure 2 on page 7 compares growth in GDP and GSP over the period 1997-2016 (Illinois 2017 GSP is not yet available). This graph illustrates that GDP and GSP have tended to move together over this period, but the relationship has become weaker since around 2008, suggesting that the Illinois economy has not made a full recovery since the great recession.
However, it is not appropriate to use either GDP or GSP to try to predict “big three” revenue for the following reason: Illinois’ tax revenues are not closely aligned with movement in GSP, as illustrated in Figure 3 on page 8. As we note above GDP and GSP are measures of overall economic activity, but Illinois does not tax all economic activity. For example, economic activity related to services is included in GSP, but Illinois does not tax services. To the extent that the service economy has grown in Illinois, tax collections have not followed suit. There are other similar situations where items included in GSP are not taxed.
R-squared is a statistical measure that in this context represents the percentage of revenue growth that can be explained by changes in GSP. R-squared values range from 0 to 1 and are commonly stated as percentages from 0 to 100%. An R-squared of 100% would mean all movements in “big three” revenue are completely explained by movements in GSP. During the period 1998-2010 the actual R- squared value for this relationship is 44.6 percent, indicating that change in GSP is not much of a predictor in changes in “big three” revenue.
Without a doubt, economic indicators like GSP and GDP and their components are important measures of how robust various aspects of the economy are. Higher GSP growth is obviously a good thing, and our overall economic growth would have been higher if we had grown at the national average. However trying to turn either of these variables into predictors of revenue growth is wrong because they explain less than half the growth in “big three” revenues and should not be used to support any calculation of Illinois’ lost tax revenues attributable our less-than-stellar economic performance. This fact is acknowledged in the Governor’s Operating Budget where revenue forecasts for the “big three” are developed using forecasts for wages and salaries, dividends and interest, corporate profits and retail sales and not GDP or GSP.
That’s basically been the argument for a service tax over the past several decades. We can’t “capture” enough growth without it.
- NeverPoliticallyCorrect - Thursday, May 10, 18 @ 10:24 am:
SO the answer is higher taxes. But what is the question? Is this to fix the budget hole or the pension funding gap or the lack of any meaningful infrastructure spending over the past decade. What will be the breaking point for people?
- Past the Rule of 85 - Thursday, May 10, 18 @ 10:24 am:
The sales tax was started in the 1930s and the income tax was created 50 years ago. The state economy was very different then. I’ve said for years that until tax policy is changed to reflect today’s economy all the games, gimmicks and unconstitutional ploys to patch things together until the next election will not get us out of this mess.
- @misterjayem - Thursday, May 10, 18 @ 10:28 am:
“That’s basically been the argument for a service tax over the past several decades. We can’t ‘capture’ enough growth without it.”
Almost as if, instead of a fuel tax, we paid for our highways with a tax on horseshoes and wheelwrights.
– MrJM
- Anonymous - Thursday, May 10, 18 @ 10:36 am:
“State tax revenues will increase if Illinois’ economy grows at the national rate.”
How to grow IL’s economy? Good paying jobs.
- Mama - Thursday, May 10, 18 @ 10:39 am:
IL needs to tax all junk food and sweetened drinks. Junk means it has little or no nutritional value.
- JS Mill - Thursday, May 10, 18 @ 12:15 pm:
=“That’s basically been the argument for a service tax over the past several decades. We can’t ‘capture’ enough growth without it.”=
Martire’s argument for 15 years.
1% sales tax that goes straight to the structural deficit. Maybe it needs to be 2% now. pick a number, the revenue goes directly to the debt. That can free up some funding for other things, but it won’t impact the income tax rate for a while.
- thechampaignlife - Thursday, May 10, 18 @ 1:26 pm:
Set it at 1% to get it established. Cut the income tax by the same dollar amount that the service tax would raise so it is revenue neutral. Same pie, just cut differently. Less tax on earnings, more on spending, which people have more control over.
- Give Me A Break - Thursday, May 10, 18 @ 4:24 pm:
==Less tax on earnings, more on spending, which people have more control over.==
Really? People have more control over their spending than their earnings? What “people” are you talking about? Certainly not the huge number of income earners in this state who generally have next to no disposable income. How in the world do people who can barely feed, clothe, and house themselves (if they’re even able to do all three) supposed to control what they spend? Get a grip.
- thechampaignlife - Thursday, May 10, 18 @ 9:46 pm:
Yes, in fact, they do. They can delay a haircut, DIY a repair, or otherwise cut costs when it comes to services. But how many people choose how much they earn?
Your statement is highly subjective: “huge” numbers, “next to” no “disposable” income, “barely” feed…themselves. I disagree that the numbers are huge. Heck, median income is $77k so half the population makes more than that. My family’s AGI is under $30k and we are doing fine. I am guessing yours is higher, so spare me the lecture.