Fiscal Pain From Fair Tax Defeat Will Be Broad-Based, Especially for Tax Payers

By: Christopher Ryan Crisanti

Illinois voters convincingly struck down Gov. Pritzker’s fair tax initiative, which would have allowed the General Assembly to levy higher taxes on those who make more than $250,000 a year, while also providing relief to those who make less than $100,000.

Gov. Pritzker recently responded by noting that painful cuts will be likely as well as increasing the flat income tax by one percentage point. There will be many who will be confused and angry at the possibility of yet another tax increase, having the perception that voting “No” was suppose to stop an increase.

But that was not the point of the fair tax and, as I previously wrote in an op-ed in the Daily Line, the threat of big money in this referendum had the potential to sway voters through anecdotal means without regard to evidence. Unfortunately, that’s exactly what it did.

While those who may marvel in the fair tax’s defeat, the unfortunate truth is that the reality of Illinois’ fiscal situation will soon become more directly apparent.

Rising pension liabilities will continue to eat up more of the state’s general fund and the extra revenue from the fair tax was meant to help alleviate that burden. While current auctorial assumptions by the Illinois Commission on Government Forecasting and Accountability suggests that the funding ratio for all five of the state’s retirement plans is actually expected to increase overtime, the reason is partially because the state will need to allocate more and more to pension costs moving forward. Total pension liabilities are expected to take up roughly 26 to 27 percent of the general fund moving forward until about 2045.

With more money needed to go to fund pension liabilities, this means less funding for public services and investment, including increasing the financial support from the state to local schools to ease the current property tax burden. State aid to schools is only about 24 percent of its budget, which is one of the main issues on why property taxes are high but that’s a story for another column.

So why push for the fair tax instead of pension reform? The General Assembly passed a series of bills in the early 2010s to address the pension issue. However, much of the reform was struck down as unconstitutional because the court ruled it had the potential to “diminish or impair” pension benefits.  

The General Assembly could potentially pursue referendum to change the Constitution, but that would most likely result in a long legal battle with unlikely success. Even if it ends up being successful, it will be a while. In effect, pursuing income tax reform was probably the more pragmatic route to go.

If a referendum on pensions is unlikely, why can’t the state simply cut its way to prosperity?

Despite the necessity for budget cuts to shore up payment flexibility to pensions, balancing cuts without revenue would be fiscally irresponsible. The state has a structural deficit, meaning that the state’s system of taxation (e.g. the flat income tax rate and overreliance of the sales tax on goods, not services) is inadequate to fund services long-term.

Moreover, the amount the state spends on services is not as high as the common perception. According to the Center for Tax and Budget Accountability (CBTA), general fund spending on services, adjusted for inflation, is actually about 11 percent less than it was 20 years ago. The CBTA also noted that Illinois ranked 39of 50 states when it comes to spending as a share of GDP.

In effect, the pension issue combined with the structural deficit is a recipe for a dire fiscal outlook that will most certainly result in more revenue needed beyond a mere 20 percent increase in the flat income tax.

The fair tax was not meant to completely solve Illinois’ fiscal woes, but help alleviate the burden. It was expected to bring in $3.4 billion a year. That $3.4 billion is now revenue lost. It was designed to enhance economic mobility by adopting a more optimal system of taxation. Instead, taxpayers will continue to pay the same rate, even if (or when) that flat rate is increased. And with pension obligations continuing to rise and no reform to the structural deficit, taxpayers will bear the burden.

So are we better off now without marginal income taxation than we are with the flat rate? The consequences are yet to be seen but considering the evidence and the fiscal reality I would, in this case, vote “No.”