Steve's Blog

In my last post, I said that the pension cost shift that the Governor proposed in his budget address is nothing but an attempt to balance the State’s budget on the backs of property taxpayers, and that I would not support it.

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However, consider the intersection of the following two points:

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• “The State has the primary responsibility for financing the system of public education.” Constitution of Illinois, Article X, Section 1
• “In our system, the state gets pension bills and just pays the tab.” Governor Rauner’s Budget Address

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If pensions are part of the “system of public education”, then it’s entirely reasonable to put that cost onto the State. However, what if we went further and imposed the full constitutional imperative for education funding on the State, rather than just pensions? What would such a change look like?

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If we’re to lower the burden on property taxpayers, the first thing that would be needed is some way to limit the amount that could be levied for schools. And for the State to assume its constitutional duty of 51% funding, it would have to find an additional $3.2 billion in revenue.

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As it turns out, there’s a bill currently in the Rules Committee (where all good bills go to die) which would go a long way towards doing just that. H.B. 4042 was filed on May 1 of 2017, a bill on which I’m a chief co-sponsor. While it wouldn’t put the entire cost of education onto the State, the bill would limit the amount that could be levied for schools to 4% of equalized assessed valuation (EAV), or 1.33% of fair market value. In exchange for that reduction, the state income tax would be raised by 1%. Doing so would almost exactly offset the reduction in property taxes provided for in the bill.

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After doing some research, I’ve concluded that instead of increasing the income tax to provide the offset, the state sales tax should be the vehicle for raising the additional revenue. Here’s why:

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• We just raised the income tax to 4.95%, and raising it further would serve to drive more people out of the state.
• The current state sales tax rate of 6.25% has not been raised since 1990. A dollar in 1990 is currently worth $.53.
• If there’s ever a move toward implementing a “destination based” sales tax, having sales taxes be the source of education funding before the fact would mean that revenues derived from it would be available to contribute to education cost. There’s a case currently before the U.S. Supreme Court which may very well grease the skids toward that result.
• We now live in an economy where services are a much larger percentage of what we spend, and broadening the base of services which would be subject to the sales tax would allow the increase in the rate of tax to be less than would be the case if we didn’t broaden it.
• Our surrounding states include a much wider range of services in their sales tax base than does Illinois, where we generally limit service sales taxes to utility fees.
• Illinois does not currently tax retirement income, but everyone collecting a pension shops.

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I asked the folks at the Commission on Government Forecasting and Accountability (COGFA) to provide me with an estimate of how much the sales tax rate would have to change to provide the $3.2 billion offset to property taxes, and their answer was an increase of 2%, to 8.25%. That did not take into account broadening the service tax base as provided above nor any destination based sales tax, so the rate increase would likely be less.

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I calculated my own property taxes using the levy limitation provided in H.B. 4042 and found that I would save $1,770 per year, in my case a 28% reduction. I’d have to buy an awful lot of taxable stuff to pay that much in sales tax.

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Shifting the burden of education funding to sales taxes is something that was done in Michigan back in the 1990’s, where the entire cost of education is paid for that way. Click here to see a Power Point presentation showing how it works.

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So how does this tie in to the cost shift? As I said before, I haven’t heard anyone complaining about putting school districts on the hook for both the employer and employee share of pension costs, so long as it doesn’t result in higher property taxes. In fact, it would probably deter school districts from doing such things as spiking salaries so as to boost post-retirement pensions. We’d have to make adjustments to the recently passed school funding formula to take the shift into account, but again the issue here is one of who pays the bill.

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I’ve spoken to several school superintendents who brought up a couple of sound points:

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• Given the labor laws in Illinois, districts have less leeway than we think in negotiating labor contracts. Without a prohibition on teachers’ ability to strike, unions have school districts over a barrel.
• The State has imposed over 200 unfunded mandates on schools since 1992. (By the way, here’s another one that’s just been proposed, and it’s a doozy.) Mandate relief is sorely needed.
• Finally, and probably most important, is that as bad as the property tax burden is, at least they know that the money will be there, unlike the uncertainty that would arise by expecting the State to fulfill its responsibility to consistently fund education. I can’t say that I disagree with them on this point.

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Some may ask: “My property tax levy is less than 4% of EAV. Why should I sign on to an increase in the sales tax which won’t give me a corresponding reduction in property taxes?”

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My answer is that there’s a cancer spreading throughout Illinois, and healthy communities aren’t immune from its spread. Take for instance the south suburbs in Cook County, where there’s a vicious cycle of high property tax levies leading to ever greater blight and decline. How long will it take for that blight to spill over into the healthier communities on their borders and then beyond? If this state is ever going to come back, it needs to create economic growth in those very areas that now cannot compete because of the crushing burden of high property taxes. It’s going to take a commitment from all of us, and it must begin with accepting the fact that economic decline in one part of the state affects those who haven’t yet seen it on their doorsteps, because if we don’t make that commitment, it will certainly find us.