Balancing budget will not be easy

Balancing budget will not be easy

By Richard F. Dye

The state of Illinois' budget problems are severe, even after all the budget cuts of recent years, and even assuming the pension changes enacted in December 2013 survive a constitutional challenge.

Projections from several sources agree that Illinois faces a deficit at least $4 billion in fiscal year 2016, and growing $500 million to $1 billion each year after that. We at the University of Illinois' Institute of Government and Public Affairs estimate that the state budget deficit will reach $12.4 billion in fiscal year 2025.

Deficits of this magnitude are bad news, because eliminating them means some combination of big spending cuts or big tax increases. But politicians don't want to give bad news, and taxpayer/voters don't want to hear it.

Denial of reality and avoidance of hard choices are more predictable responses. This dynamic over many years is exactly what has led to the problems we face today.

Worse, 2014 is an election year, giving office seekers an extra incentive to downplay the problem and avoid the tough choices about who will pay.

Each year of delay in eliminating the deficit makes the future situation even worse. Just like a family that spends more than its income in a given year, if the state runs a deficit they must either pay with funds saved in prior years or take on new debt.

Once spent, previously accumulated assets and the interest they would have earned are unavailable in the future.

Likewise, new debt saddles future taxpayers with bills for the services we receive today — plus interest.

Policymakers and office seekers often offer easy-sounding but unrealistic solutions in their attempts to delay taking painful action.

For example, you might hear "an improved economy will grow us out if this mess." Encouraging economic growth is highly desirable and could help reduce the state's budget deficit, but cannot stand alone as a realistic budget fix.

My research suggests that even extremely optimistic assumptions about new economic activity fall far short of eliminating the state's budget deficit.

You might also hear officeholders and candidates arguing that cutting "waste, fraud and mismanagement" in state programs will solve our budget woes. While we in Illinois are familiar with waste, fraud and abuse in government, this is probably only a tiny fraction of total government spending, even if we could root it all out.

One major choice facing state policymakers this year is whether to extend the temporary income tax rate increases of 2011 past the scheduled rollback date of Jan. 1, 2015. Making these higher tax rates permanent would raise an estimated $4.5 to $5 billion in fiscal year 2016 — alleviating a sizable part of the state's problems.

But this would come at high political and economic cost. It would continue Illinois' very high tax rate on low-income families compared with other states, and its highest-in-the-nation corporate income tax rate. Addressing either of these concerns would reduce the amount of revenue collected.

The state's budget deficit problem is huge and growing, requiring tough choices. We are not likely to make the necessary changes in a single year.

Instead we need to define a credible path toward fiscal balance.

Ask yourself and those seeking your vote: Which combination of specific revenue increases and spending cuts should be enacted over the next several years to make Illinois fiscally sound? Are these changes politically feasible and realistic?

There are no easy answers. Solutions to our problems will require pain — probably both tax increases and spending cuts. Don't believe anyone who tells you otherwise.

About the Illinois Budget Policy Toolbox series

1. igpa.uillinois.edu/budget-toolbox

The toolbox is a virtual resource center that assesses policy options that the state's leaders can consider as they work to put Illinois on sound fiscal footing.

2. Taxing retirement income

Illinois doesn't tax retirement income, creating a tax expenditure of approximately $2 billion per year.

3 The personal income tax

The state has a number of options for changing the personal income tax, each with different effects.

Richard F. Dye is co-director of the Fiscal Futures Project at the University of Illinois Institute of Government and Public Affairs.

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Skepticity wrote on March 23, 2014 at 11:03 am

I am deeply troubled by the assumptions in the concept that by not taking part of someone's retirement income you have "a tax expenditure."

"2. Taxing retirement income

Illinois doesn't tax retirement income, creating a tax expenditure of approximately $2 billion per year."

This kind of governmental doublethink that assumes that money belongs to government and that failure to take it is an "expenditure" is disgusting. 

Why not make a simpler assumption:

People who did not earn money are not entitled to it, and people who earned it are entitled to keep as much of it as possible.  Taxes are to pay for government services, not to redistribute. 

Simple...