PI Original Ellyn Fortino Wednesday June 24th, 2015, 5:59pm

Cash-Strapped Illinois Getting Shortchanged In Federal Revenues, Report Shows

A new study by the Illinois Economic Policy Institute makes the case for closing the "payer state" gap at the federal level. Progress Illinois takes a look at the new research.

If the federal government did more to level the playing field for so-called "payer states," Illinois could see billions of dollars in additional revenue per year, according to a new study by the Illinois Economic Policy Institute (ILEPI).

Illinois is considered to be a "payer" or "donor" state because residents pay more in federal taxes than the state receives in the form of federal funds. Nationwide, Illinois gets back the fifth smallest amount of federal spending per capita for every dollar contributed to the federal tax system, the research showed.

A combination of Illinois being a "high-wage" state plus the federal government's graduated income tax system, which applies higher rates to larger incomes and lower rates to smaller incomes, means Illinoisans are collectively contributing more in federal taxes than their counterparts in states where household incomes are lower.

"Significant redistribution of federal resources from rich states to poor states is not necessarily an unacceptable policy goal," ILEPI's policy director Frank Manzo wrote in the report. "In fact, Americans should support investments in education, infrastructure, poverty alleviation, and economic development so that no state falls behind. However, to the extent that (right-to-work) laws reduce worker incomes and increase working poverty, this redistribution is inefficient. States should not be rewarded for enacting bad public policies. Unfortunately, the current system of federal funding to states does just that."

According to ILEPI's research, Illinois residents paid an average of $7,265 in federal individual income and FICA taxes for Medicare and Social Security in 2013. That year, Illinois had the 10th highest federal income and FICA tax collections per capita among the 50 U.S. states.

In 2013, the national average for federal income and FICA tax contributions was $6,098 per person, meaning that "Illinois residents pay $1,168 more, or 19.2 percent more, to the federal government than their counterparts across the country," the report reads.

For every dollar contributed to the federal tax system by Illinoisans, the state gets back 18.1 cents in federal funds for state government operations. That figure is 32.2 percent less than the national average of 26.7 cents per dollar.

In calculating state-by-state federal spending per tax dollar, the study excluded federal revenues for Social Security, military or space expenses, or cash assistance programs such as the Earned Income Tax Credit.

ILEPI's research showed that Illinois would see between $2.6 billion and $8 billion in additional annual revenue if the state received federal government transfers proportional to the national average.

If Illinois received a "fair share of federal funding" relative to the national average, the state's fiscal year 2016 budget deficit of more than $6 billion would turn into a budget surplus of up to $1.8 billion, according to the report.

ILEPI also looked at per capita federal tax contributions in states that allow collective bargaining by employees versus those with right-to-work laws limiting union power.

The figure averaged out to be $6,991 per person in collective-bargaining states and $5,048 in right-to-work states.

Illinois residents "contribute 28.3 percent more in federal income and FICA taxes (+$1,431 per person)" than the right-to-work state average and "get back 40.7 percent less in federal funds to their state government per dollar of federal income tax paid (-12.4 cents per tax dollar)," the report reads.

If Illinois got the same level of federal support as right-to-work states, that would translate into as much as $11.5 billion in additional annual revenue for the state. 

"Despite these findings, the federal government is not the primary culprit to blame for Illinois' fiscal woes," Manzo writes. "State government officials in Illinois should be operating responsible, self-sufficient budgets within the state's financial means - with or without additional resources from the federal government. The point is that there is significant room for improvement in the amount of federal revenues provided to Illinois. In the absence of proportional support from the federal government, Illinois has had to increase state tax revenues and fees. The budget problem would essentially be solved if Illinois received transfers at the average rate. Without action from the federal government, the governor and General Assembly will have to increase taxes and/or cut important state services."

U.S. Rep. Bill Foster (D-IL,11) is at least one federal lawmaker who has been calling attention to the federal funding disparity between "payer states" and "taker states."

More recently, Foster put forward a proposal earlier this month that, he says, would have shrunk the federal spending gap between states that are net givers and takers of federal taxes. The measure, which ultimately failed in the House by a 232-195 vote, sought to eliminate the Experimental Program to Stimulate Competitive Research, or EPSCoR. That's a federal scientific research funding program created in 1978 with the intention of helping states that have historically received limited research and development support.

Speaking on the House floor before the legislation was defeated, Foster explained why he favors eliminating the EPSCoR program.

"EPSCoR was started as an experimental program in 1978 with the goal of redistributing federal research dollars into states that traditionally received less than their 'fair share' of NSF [National Science Foundation] funding," Foster said. "However, because 'fair share' was determined on a per state basis rather than a per capita basis, it has devolved into just another program that steers money into smaller states that already get far more than their fair share of federal spending."

"The EPSCoR states are hardly lacking for federal largesse," the congressman added. "According to the Tax Foundation, in a typical year the EPSCoR states received approximately $60 billion more in federal spending than they paid in federal taxes."

Back in February, Foster and U.S. Rep. Scott Garrett (R-NJ,5) also jointly introduced the "Payer State Transparency Act of 2015," H.R., 787. The legislation, which has been pending in the House Committee on Oversight and Government Reform since its introduction, would require data collection as well as an annual report on federal tax burdens and spending in each U.S. state.

"As a businessman who co-founded a manufacturing company, I understand the financial drag that federal payer state policies put on companies that are committed to keeping good jobs here," Foster said in a statement announcing the legislation's introduction. "As the representative of Illinois' 11th District in the U.S. Congress, I recognize the burden it places on middle-class families, and the tragic underinvestment in physical and human capital driven by the fact that Illinois is a payer state. I've introduced the Payer State Transparency Act to develop a clear picture of how big this problem really is and to find ways to make sure Illinois taxpayers are getting their fair share."

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