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The tax hike doesn’t look “temporary” to me so far

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Illinois

* My syndicated newspaper column looks at tough budget times still ahead of us…

Caterpillar CEO Doug Oberhelman seemed to be under the impression after his meeting with Gov. Pat Quinn last week that the state’s income tax hike actually would expire in four years.

“The tax increase is temporary,” Oberhelman told reporters, who wanted to know how he really felt about the recent tax hike. There’d been much media speculation that the Caterpillar CEO was so unhappy about the tax increase that he might move his company elsewhere.

Oberhelman added that revenue growth will be necessary to fill the state’s budget gap and “it’s going to take some spending cuts,” which, he said, he was confident Gov. Quinn could pull off.

After Oberhelman answered the question, Quinn told reporters that the “income tax is a four-year situation,” and said he wanted to “erase the deficit” during that time.

Technically and legally, the tax hike is temporary. Two income tax hikes have been allowed to expire in Illinois history, so it’s possible that this one will as well.

But the governor used phantom revenues in his most recent budget plan and proposed an increase in state spending, not a decrease.

The Senate Republicans have laid out the problem pretty clearly. And it’s quite grim.

They project the state deficit will be $22.7 billion in five years. I’ve had a problem with those numbers because of some of the assumptions they used. So, I asked them to help me game some additional projections, using what I considered to be more realistic assumptions, and they obliged.

First, toss out the governor’s $8.7 billion borrowing plan to pay past-due bills (which doesn’t look like it can pass this year). Then use House Speaker Michael Madigan’s (relatively low) revenue and spending projections for the coming fiscal year. Then grow state spending by 2 percent a year and project 2 percent annual revenue growth — and let’s see what happens.

What you’d wind up with is a $1.5 billion deficit during the last year that the tax hike is in effect.

But when that tax increase goes away, Illinois will be left with a $5.7 billion deficit. That’s about $1.3 billion higher than the deficit projected for the end of the state’s current fiscal year. Not good at all. Terrible, in fact.

OK, that didn’t work, so let’s try again. How about growing spending by just 1.5 percent a year? You’d wind up with a $524 million deficit during the last year of the allegedly temporary tax hike, but there’d be a $4 billion deficit the very next year, after the tax hike had expired.

Again, that’s about where we are right now. Any claims of budgetary restructuring would be shown to be laughably false.

Last try. Let’s plug in zero spending growth for four years. Illinois would have a $2.5 billion surplus the last year of the tax hike.

Hooray!

A year later, the surplus still would be $1.1 billion, but the state also would have a structural, operating deficit of $1.4 billion, and that deficit would continue to rise from then on out.

Bummer!

Also, zero spending growth may not sound all that difficult to do, until you realize that pension payments, Medicaid and state employee and retiree health care costs all are rising exponentially every year. All that spending would have to be somehow reined in, or other state programs — education, human service and pretty much everything else — would have to be viciously slashed year after year. In five years, things would be very bad indeed.

And considering the cold, hard fact that state legislators as a general rule hate to cut budgets, how can they be expected to keep a tight lid on everything year after year after year after year? They won’t do it. Simple as that.

The bottom line here is that if the governor is serious about putting Illinois on a solid financial footing, he needs to find a lot more revenue and/or make lots more cuts.

Caterpillar’s Oberhelman went out of his way to heap praise on the governor last week. And now Quinn needs to do whatever he can to keep his word.

He obviously doesn’t enjoy cutting the budget, but it has to be done if he hopes to wipe out that deficit by the end of his term.

* Related…

* Could Illinois’ Income Tax Hike Become Permanent?

* Editorial: Clip and save

posted by Rich Miller
Monday, Apr 11, 11 @ 3:26 am

Comments

Assumung that the numbers are even close, any projected savings will be spent by the folks in Springfield. Any tax cuts would be decried as unfair to whomever and hurting those most vulnerable. Permananet until someone cuts them, it will be a fight.

Comment by Wumpus Monday, Apr 11, 11 @ 8:30 am
The day this passed I said Quinn was lying by saying it’s a temporary tax hike. Does it take a 2/3rds vote to keep the tax hike?

Comment by Fed up Monday, Apr 11, 11 @ 8:36 am
Illinois isn’t managing to pay its bills, but it will find new ways to spend new revenue.

Comment by Aldyth Monday, Apr 11, 11 @ 8:41 am
Blah blah

Comment by Carbondale Monday, Apr 11, 11 @ 8:45 am
- I said Quinn was lying by saying it’s a temporary tax hike. -

Read the law, it is temporary. Being uncertain about what the GA will have to do in the future isn’t lying.

Comment by Small Town Liberal Monday, Apr 11, 11 @ 8:52 am
Stl I’m not sure if you get it or not Quinn lied. He stated he supported a tax increase to 4% and would veto anything above that an obvious lie. He stated he supported the death penalty an obvious lie and his continued lying about this being a temp tax hike. Heck even Madigan doesn’t believe the figures he is using for revenues ( nice way of saying he’s lying). Quinn will say anything he wants because time and time again Illinois voters have accepted lie after lie.

Comment by Fed up Monday, Apr 11, 11 @ 9:07 am
Optimist: The glass is half full.

Pessimist: The glass is half empty.

Realist: The glass has a big freakin’ hole in the bottom.

Thanks for keepin’ it real, Rich.

Comment by Yellow Dog Democrat Monday, Apr 11, 11 @ 9:18 am
Always assumed the tax hike would be permanent …

Comment by Retired Non-Union Guy Monday, Apr 11, 11 @ 9:24 am
So, using Rich’s numbers, we would need to keep the income tax AND decrease the real size of government to return to a surplus which would allow us to begin retiring the debt (don’t forget about the debt here). Another wild card is that Federal payments to the state will decrease even further as Congress and POTUS wrestle with the Federal debt.

Even the Republican budget does not do enough to cut spending to bring us on a path to prosperity. All it does is slow the rate of growth without making any cuts to the real size of government. And the Democrats and Pat Quinn are AWOL showing any path to sustainability.

YDD should send his comment to the “Leadership” in this state. I think one option is missing though;

Politicians: Rose colored glasses.

Comment by Cincinnatus Monday, Apr 11, 11 @ 9:33 am
There will be a permanent tax hike eventually - probably 4%

If we are lucky. Politicians and math, after all.

Comment by JN Monday, Apr 11, 11 @ 9:33 am
So what other options are their to grow revenues. Quinn has shown no stomach for cutting the budget. I’m sure we will hear talk about more casinos but nothing ever gets done there.

Comment by Fed up Monday, Apr 11, 11 @ 9:39 am
Has there been any time when Illinois politicians gave up money?

Comment by earl Monday, Apr 11, 11 @ 10:24 am
Where have you been? Budget cutting is real and ongoing. We have the lowest public employee-to-population ratio in the country. Public service providers are budgeted less, and not even being paid that. Universities are supported at levels of a decade ago. Wake up and have a Red Bull, dude. Or just quit spouting GOP talking points.

Comment by Ray del Camino Monday, Apr 11, 11 @ 10:24 am
I doubt they will have the votes to make the tax hike permanent in four years, but we’ll know more after the 2012 elections. That will probably be the indication of if it will be permanent or temporary.

Comment by Ahoy Monday, Apr 11, 11 @ 10:25 am
I have no illusions that the tax hike will not be permanent. There will be lots of positioning and posturing, but at the end of the day, the linguini spined politicians will flop to the side of spending because that is where they have learned to take credit.

Comment by Plutocrat03 Monday, Apr 11, 11 @ 10:51 am
The 2014 election will be a referendum on the income tax, much like the 1990 election was. I’m assuming Quinn will not be a candidate in 2014, but if he is, then he really needs to up his governing game now. There are two ways through this mess: restructure government services from the ground up and hope to heaven that the economy recovers more robustly than anyone is predicting.

The income tax might be temporary, but the problems are permanent. So even if this tax was mislabled and sold under a dubious pretext, no one is arguing that it isn’t needed. Maybe we can have an honest conversation about the next income tax hike.

Comment by 47th Ward Monday, Apr 11, 11 @ 10:54 am
“They project the state deficit will be $22.7 billion in five years.”

I assume most of that will be carried over debt from the previous 4 years. Is there some reason in Illinois that we add accumulated debt to each year’s deficit numbers? Why don’t we differentiate between the hole and hole gouging?

Comment by vole Monday, Apr 11, 11 @ 10:58 am
- Has there been any time when Illinois politicians gave up money? -

Read more closely:

- Two income tax hikes have been allowed to expire in Illinois history, so it’s possible that this one will as well. -

Comment by Small Town Liberal Monday, Apr 11, 11 @ 11:00 am
If the governor has his way, the increase will become permanent.

47th Ward has the answer, though no one wants to discuss it: Restructure government services from the ground up–state and federal. Cut federal services to only those allowed specifically by the Constitution (Art. 1 Sect. , Cut federal taxes accordingly.

Then we can determine what services we want to provide in Illinois, create an efficient structure to accomplish those goals, and increase state taxes to cover those.

Comment by Anonymous Monday, Apr 11, 11 @ 11:04 am
Anonymous 11:04 is me.

Comment by Fan of the Game Monday, Apr 11, 11 @ 11:04 am
What is the chance that some of this debt can just be written off? I am thinking particularly about debt owed to universities and primary and secondary school systems? If they have survived this long without receiving the back payments, couldn’t the legislature just pass a bill to write this off? If the legislature won’t borrow the money needed to pay the universities and the districts their overdue revenues, what is the difference?

Comment by vole Monday, Apr 11, 11 @ 11:08 am
Sooner or later, the sales tax is going to have to expand to services … that’s about the only pot of money left untapped.

Comment by Retired Non-Union Guy Monday, Apr 11, 11 @ 11:09 am
===I assume most of that will be carried over debt from the previous 4 years.===

They assume a spend to the statutory cap mentality. That isn’t going to happen.

Comment by Rich Miller Monday, Apr 11, 11 @ 11:12 am
- Cut federal services to only those allowed specifically by the Constitution (Art. 1 Sect. , Cut federal taxes accordingly. -

Somehow I doubt that’s what 47th has in mind. As far as having no way out, everyone seems to forget that there’s a whole bunch of money out there still. Folks like the Koch brothers are doing their best to keep everyone from thinking about that.

Comment by Small Town Liberal Monday, Apr 11, 11 @ 11:17 am
“I assume most of that will be carried over debt from the previous 4 years.”

I meant to include all of the debt accumulated at the present time instead of what might be added in the next 4 years.

Comment by vole Monday, Apr 11, 11 @ 11:20 am
Rich’s very good analysis is of course no surprise to Rich or anyone else who has been paying attention. We’ve all been saying tax increase PLUS cuts. All you have to do is do the math.

Comment by steve schnorf Monday, Apr 11, 11 @ 11:25 am
“… the linguini spined politicians…”

It is an insult to all linguini everywhere to compare it to politicians! Plus, it is a well known fact that politicians have no spine whatsoever.

Debt can only occur one way, spending exceeds revenue.

As Retired Non-Union Guy mentions, there are few new sources of revenue. So assuming we do hit services with sales tax, will that be enough revenue to close the gap?

Assuming no, are folks on this board suggesting that further income tax increases be instituted?

Perhaps we should revamp the income tax structure to move to a graduated income tax. Is that enough revenue?

If we are willing to consider a bottoms-up change to the revenue structure, are we willing to take the same bottoms-up approach when it comes to spending? Is there a single program we would eliminate?

There isn’t a single “leader” in this state that is even willing to frame the discussion, let alone tackle the issues. I look forward to the Triumvirate tiptoeing in circles and going nowhere.

Comment by Cincinnatus Monday, Apr 11, 11 @ 11:27 am
Thanks, Steve.

Comment by Rich Miller Monday, Apr 11, 11 @ 11:28 am
STL–47th may not have been thinking along those lines; those were my thoughts about a restructuring.

Comment by Fan of the Game Monday, Apr 11, 11 @ 11:29 am
vole, are you suggesting that government follow the corporate model of screwing the debt holders, lower level employees, pensioners, and stockholders? Remember, that approach means the guys at the top get huge bonuses for doing such a good job of screwing.

Comment by steve schnorf Monday, Apr 11, 11 @ 11:29 am
Steve,
No, I am just asking whether the state really has to fund all of its’ past dues to other units of government. And if these units of government including the university system have survived without these past owed dues, then will the state ever pay them and how. I am assuming that all the staff of these institutions have already received anything owed to them in salary and benefits.

Comment by vole Monday, Apr 11, 11 @ 11:37 am
–All it does is slow the rate of growth without making any cuts to the real size of government.–

“Government” in regards to the SOI budget is primarily education and healthcare.

Comment by wordslinger Monday, Apr 11, 11 @ 11:41 am
===“Government” in regards to the SOI budget is primarily education and healthcare.===

And pension payments.

Comment by Rich Miller Monday, Apr 11, 11 @ 11:43 am
This tax increase will hopefully be temporary and replaced with a progressive tax and an expansion of the sales tax base.

Comment by late to the party Monday, Apr 11, 11 @ 11:54 am
===And if these units of government including the university system have survived without these past owed dues. . .===

Many survived by borrowing in anticipation of being paid at some point.

Comment by Way Way Down Here Monday, Apr 11, 11 @ 11:55 am
“I am assuming that all the staff of these institutions have already received anything owed to them in salary and benefits.”

Vole - If by “anything owed to them” you mean furloughs, lay-offs, salary reductions, loss of pension benefits, etc., then you assume correctly.

Comment by lincolnlover Monday, Apr 11, 11 @ 11:58 am
Is there any information on IL average inc growth? do we truly only increase revenue 2% as a median looking at ay the past decade?

it seems part of the problem is we only consider taxes and budget cuts as the way to handle the budget.

perhaps we need to consider other ways to generate revenue. look at small fees for services provided; eliminate the special funds (we have something like 500) and have the money paid by the special interest groups in fess go to GRF instead of just being spent on a small segement of the various industry’s.

Increase reveue generating jobs in enforcement areas to bring in more money etc.

Comment by Ghost Monday, Apr 11, 11 @ 12:52 pm
Looking forward something adding to the budget challenge is the lagging growth of population and and economy.

Growth in population or a strong growth in the economy would help to make a soft landing. However, this requires the discipline to not increase the spending. Since the first budget out of the box after the tax increase has oodles of new spending, the prognosis for fiscal recovery is poor.

Comment by Plutocrat03 Monday, Apr 11, 11 @ 1:26 pm
===Since the first budget out of the box after the tax increase===

No budget has yet been passed.

Comment by Rich Miller Monday, Apr 11, 11 @ 1:27 pm
Ghost,

You are right to ask the questions you do. We often consider budgeting as a zero-sum game, which it is not. Spending v. revenue define the debt of a given year. However, revenue is a function of the wealth of the residence as much as it is taxes and fees. If the wealth of the population increases, so does the revenue to the government. Any pro-growth policies undertaken by the government should increase revenue to the state, perhaps more that some corresponding increase in taxes.

It is, however, hard to argue the benefits of spending cuts since at best, they take wealth that can be used by the taxpayers and send it through an inefficient bureaucracy. By definition, government spending robs the state.

Comment by Cincinnatus Monday, Apr 11, 11 @ 1:27 pm
–Growth in population or a strong growth in the economy would help to make a soft landing. However, this requires the discipline to not increase the spending.–

What relationship can you establish between the SOI budget and either population or economic growth?

There are numerous, much more powerful factors in play than the SOI budget.

Comment by wordslinger Monday, Apr 11, 11 @ 1:32 pm
– By definition, government spending robs the state.–

Roads, schools, universities, parks, airports, healthcare, law enforcement, civil and criminal justice systems, prisons to put away violent criminals — such drags on freedom and prosperity.

Somalia must be like the Garden of Eden.

Comment by wordslinger Monday, Apr 11, 11 @ 1:36 pm
- Somalia must be like the Garden of Eden. -

LOL. Yeah, just without all those sinful trees.

Comment by Small Town Liberal Monday, Apr 11, 11 @ 1:38 pm
wordslinger,

Good point, let’s try EXCESSIVE government spending.

Most of those items in your list indeed fall within the proper role of government. I would however contend that any subsidy where the state picks a winners/losers and interfere in market forces where those winners cannot exist without the subsidy can normally be considered an enormous waste of resources. (Rich has prohibited me from using my favorite example.)

You use healthcare as one of your examples. Do you find it slightly perverse that a significant number of out-of-state people use our tax dollars (All-Kids), or that systems that promote expenditures of tax dollars with the promise of more dollars if you include more people (Medicaid)?

Comment by Cincinnatus Monday, Apr 11, 11 @ 1:58 pm
C, you asked the question of ws, but I’ll say I don’t consider it perverse, I consider it policy and we elect the policy makers.

Comment by steve schnorf Monday, Apr 11, 11 @ 3:19 pm
Certainly the boondoggle of Mid-America Airport and the continued push for the Peoria Airports is an example of crossing the line from legitimate governmental function to gambling with the public’s money.

Millions have been spent with little prospect of payback.

Comment by Plutocrat03 Monday, Apr 11, 11 @ 6:27 pm