PI Original Adam Doster Friday July 31st, 2009, 10:19am

Chapman Misdiagnoses His "Problem Child"

Study after study these past few months have demonstrated the global
economic crisis' devastating impact on state budgets. It's no secret
why. Just as demand for government-backed safety-net services is
growing, tax revenues are plummeting across the board. And Illinois is ...

Study after study these past few months have demonstrated the global economic crisis' devastating impact on state budgets. It's no secret why. Just as demand for government-backed safety-net services is growing, tax revenues are plummeting across the board. And Illinois is right in the thick of it, with lower-than-expected returns on personal income, corporate income, and sales taxes.

In his Tribune column yesterday, Steve Chapman acknowledged this dynamic. But he went on to argue that overspending by state lawmakers is the real culprit:

The crisis in state budgets is not an accident, and it wasn't unforeseeable. For years, most states have spent like there's no tomorrow, and now tomorrow is here. They bring to mind the lament of Mickey Mantle, who said, "If I knew I was going to live this long, I'd have taken better care of myself." [...]

Illinois is another problem child. The state's general fund appropriation is some two-thirds higher today than it would be if the state had just kept those outlays in line with inflation over the last two decades. That increase, as in California, is the difference between a gaping deficit and a comfortable surplus.

Unfortunately, Chapman grossly oversimplifies how Illinois' state budget operates.

First, the facts. The Bureau of Economic Analysis tracks General Fund spending as a factor of the state's GDP. Between 1997 and 2007, the most recent year for which data was available, spending in Illinois increased by just five one‐hundredths of one percent (from 3.35 to 3.4 percent). Despite boasting the nation's 5th largest population, the Prairie State ranks 45th in spending.

Now let's dig a little deeper. Almost all of that spending growth has been concentrated in sectors over which the Illinois legislature has little control or that are tied to federal matching fund requirements. Check out the figure below from the Center for Tax and Budget Accountability's 2008 Citizens Budget Guide (PDF). Excluding health care, pensions, and education, it shows that General Fund expenditures between 1995 and 2006, adjusted for inflation using the Employment Cost Index, plummeted by almost $2.2 billion dollars. (Click the image for larger version.)

State agencies have bore the brunt. Using the same inflation comparison, appropriations between 2002 and 2007 dropped 2.69 percent for the Department of Human Services, 6.44 percent for the Department of Corrections, 7.1 percent for DCFS, and 7.79 percent for higher education. That in part explains why the number of government workers in Illinois has shrunk by 22 percent over the past eight years.

To be sure, health care spending is on the rise. But it's not necessarily because the state is too generous in the coverage it provides.

Take Illinois' Medicaid obligations, for example, 57 percent of which are paid for by the state. Between 1980 and 2005, over 15 percent of Illinois private sector workers lost their employer-provided health insurance.  Lawmakers from both parties quickly realized that the income eligibility thresholds were too low at a time when demand for government-run coverage was growing.  Due to the combination of slightly higher eligibility levels and rising health care costs, Illinois increased inflation-adjusted spending 4.34 percent between 2002 and 2007. But it's tough to argue that ensuring more struggling state residents -- at a time when the federal government refused to do so -- was bad public policy.

Meanwhile, inflation-adjusted education appropriations grew by $850 million between 1995 and 2006 here in Illinois.   But it's hard to argue that we're spending too much. We still rank 49th in the amount of funding provided for K-12 education nationwide.

As a libertarian, Chapman isn't going to be on the front lines campaigning for a more progressive income tax. But if he wanted to cast blame on anything other than this year's recession, one major culprit could have been the state's broken tax structure. As this CTBA report (PDF) shows, between 1999 and 2005, revenues from the four major Illinois tax sources did not even keep pace with inflation.  (Click the image for larger version.)

Without enough money coming in, lawmakers irresponsibly skipped pension payments, a main contributor to the state's bond downgrade on Wednesday. But they couldn't skimp out on matching funds nor cut much deeper in many departments than the state already has. The decision to use the pension system as a credit card rather than reform the tax structure, along with the greater economic climate, is the reason the state faces a multi-billion deficit next year, even after drastic cuts.

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