Things are not going as planned for Gov. Rod Blagojevich and his “Tax Fairness Plan.” Neither city halls nor business groups nor Republicans nor Democrats have flocked to the governor’s side. They are all opposed to what would be the biggest tax increase in Illinois history.
Ironically though, the governor’s travails have for the past few months taken the focus off another controversial tax plan known as House Bill 750. Championed by state Sen. James Meeks (D-Chicago), the legislation would “swap” modest property tax relief for substantial increases in the personal income tax and state sales tax.
For years a political loser, Meeks’ legislation has now emerged as a relatively moderate counterproposal to the governor’s plan. Even Senate Minority Leader Frank Watson (R-Greenville) has admitted the swap would be considered.
The reason for the tax swap’s resurgence appears to be the $3.6 billion in property tax relief it promises. The governor’s plan promises only $1 billion. With either plan, the relief would be delivered through a state fund called an “abatement fund” established to pay local governments to lower everyone’s property tax bills. Essentially, the state government would be taxing us more with the promise that it would then pay our property taxes for us.
Not surprisingly, neither proposal prevents local taxing districts from raising taxes even while they receive abatement funds from the state. Nor does either proposal prevent lawmakers in Springfield from siphoning abatement funds away to other programs, as has happened with the road fund and the lottery.
One need not be cynical to wonder how long this kind of tax relief can last. When the governor took office in 2003, state spending totaled $47 billion. At the close of the 2006 fiscal year spending exceeded $52 billion. That’s $5 billion in increased spending in just more than three years.
And there is more new spending on the way. The governor has already proposed a $3.5 billion health care initiative. Every year brings new and expensive programs. Next year will be no different. That abatement fund will evaporate in no time.
And it is likely that while the General Assembly is raiding the abatement fund, local governments will be raising taxes at a breakneck pace. The Civic Committee report, “Facing Facts,” is excellent on this point: “Though reductions in local property taxes would make suburbanites feel good when they receive their next property tax bill, this sensation of pleasure would wear off when they realize that their income taxes or sales taxes have increased. Moreover, such reductions would make it possible for local taxing authorities over time to raise the property taxes back up to (if not above) the current levels.”
When addressing constituents, lawmakers typically subtract the amount of “property tax relief” from the total revenues of a “tax swap” in order to calculate the net tax hike. But if the Civic Committee is right, and since the state will likely raid any abatement fund, lawmakers should be doing the exact opposite. Local property taxes will rise and tax relief will evaporate; lawmakers should be adding the amount of “relief,” not subtracting it, to figure the eventual hike.
The governor’s plan will initially hike taxes by $8.6 billion, with $1 billion dedicated to property tax relief. The typical but flawed formula used by lawmakers tells us the net revenues will be $7.6 billion for state and local governments. In reality, the governor’s plan could lead to at least a $9.6 billion increase in state and local taxes.
House Bill 750 will initially hike taxes by $9.05 billion, with $3.6 billion dedicated to property tax relief. The typical but flawed formula used by lawmakers tells us the net revenues will be $5.45 billion for state and local governments. In reality, HB 750 could lead to at least a $12.65 billion increase in state and local taxes.
Say what you will about the pyramiding or regressive effects of a gross receipts tax, the centerpiece of the governor’s “tax fairness” plan. In the long run, the damage done by HB 750 could surpass it by $3.05 billion.
Both proposals would have adverse if not devastating effects on the Illinois economy. But taxpayer advocates should hand it to the governor: His is only the second-most reckless plan on the table this spring.
Collin Hitt ([email protected]) is a policy analyst for the Illinois Policy Institute. Michael Van Winkle ([email protected]) is a legislative specialist for The Heartland Institute.
For more information …
For more information on Illinois Gov. Rod Blagojevich’s proposed gross receipts tax, see Trevor R. Martin, Testimony on a Plan to Implement a Gross Receipts Tax in Illinois, March 9, 2007, http://www.heartland.org/Article.cfm?artId=21200.
