PI Original Adam Doster Monday November 17th, 2008, 3:48pm

The Need For Recessionary Tax Reform

State governments are in a world of hurt. Revenues from capital
gains and income taxes are shrinking while job losses are exacerbating the need for unemployment relief and social programs. Like
good Keynesians, state officials across the country are crafting their own plans ...

State governments are in a world of hurt. Revenues from capital gains and income taxes are shrinking while job losses are exacerbating the need for unemployment relief and social programs. Like good Keynesians, state officials across the country are crafting their own plans for labor-intensive infrastructure projects to fight off the recession. The New York Times and Stateline have both reported on the efforts of governors in Oregon, Vermont, Washington, Ohio, and Florida to stimulate the economy through smart government investment. More states are expected to follow suit in January.

As the Times also notes, budget directors and legislators have said that tax increases are not likely in most struggling states. Illinois Deputy Governor Bob Greenlee shares that opinion. Check out his comments yesterday during an appearance on FOX Chicago Sunday:

For most states, this approach makes sense. Across-the-board tax increases during an economic downturn contradict counter-cyclical fiscal policy; if consumer demand is low, taking more out of people's paychecks won't facilitate spending. But Illinois' tax system is not like most states' and any discussion of tax hikes should be analyzed in proper context.

One of only seven states with a flat income tax (ours is constitutionally-mandated), Illinois is ranked 45th in tax burden as a percentage of income -- this despite boasting the fifth largest state economy. And even though revenues are low, working and middle class residents throw in more than their fair share. In fact, as we've previously noted, while the bottom 20 percent of Illinois taxpayers faces the fourth highest burden of any income-tax generating state in the nation, the top 1 percent faces one of the lowest burdens.  From a report (PDF) by the Insitute on Taxation and Economic Policy:

Ignoring issues of basic fairness and public approval, the long-term economic strength of the state may depend on fundamental tax reform. For example, the state would collect an additional $3 billion annually if people making over $250,000 a year paid an additional three percent in income taxes.

It's not an ideal time to raise taxes on anyone, but the economic crisis embroiling the state could provide just the opening to implement tax reform that's both long overdue and a potential solution to the growing deficit. House Bill 750/Senate Bill 2288, the school funding reform legislation being pushed by Sens. James Meeks and John Cullerton, is awaiting action and would be a good place to start. We can only hope legislators are bold enough to buck the anti-tax demagoguery so common in Illinois and make the right change.

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