Finding Alternatives to Higher Taxes

Published October 21, 1994

Illinois taxpayers are about to encounter a well-orchestrated campaign for a major permanent tax increase in 1995. In January, Illinois’ Bureau of the Budget is expected to announce that revenues for the current fiscal year will fall approximately 3 percent short of spending, producing a “budget gap” of between $1 and $1.5 billion. The Chicago Public Schools are expec ted to ask the state for a $300 to $500 million bailout early next year. And special interest groups are gearing up for an all-out campaign for higher taxes.

Governor Jim Edgar has refused to renew the “no tax increase” pledge he took at the start of his current term. His Democratic challenger, Dawn Clark Netsch, says she would permanently increase the state income tax by 42 percent if elected. Only the Libertarian Party’s candidate for Governor, David Kelley, opposes tax increases, but lack of money and media attention means few voters will hear his message.

Is a major tax increase, in fact, unavoidable? Do we need a permanent income tax increase to close the budget gap, adequately fund schools, and make our streets safe?

The Heartland Institute has conducted a study of the Illinois state budget to seek answers to these questions. We discovered that state spending in Illinois has increased 137 percent since 1980, averaging 7 percent per year. Since 1990, state spending has increased at a much faster rate, almost 12 percent per year.

The sources of this recent growth have been the Department of Public Aid (up 54 percent since 1991), Department of Children and Family Services (or DCFS, up 56 percent), and Department of Central Management Services (or CMS, up 39 percent). Natural revenue growth and even increasing debt have been insufficient to cover this rapid escalation in spending.

If spending by these three departments of state government were held to the projected rate of growth in Illinois personal income (5.2 percent per year), while the remainder of the state budget continued to grow at an annual rate of 6.7 percent, overall st ate spending would increase at 6.4 percent per year, a rate below the projected natural rate of increase in tax revenues.

The coauthors of the Heartland study believe the following actions could bring state spending under control:

  • Privatize Medicaid by giving Medicaid beneficiaries vouchers with which to purchase private health insurance. In addition, allow Medicaid beneficiaries to open Medical Savings Accounts, similar to Individual Retirement Accounts (IRAs), into whi ch they could deposit the difference between the value of the voucher and the actual cost of private insurance coverage. This account could be used to pay for out-of-pocket medical expenses.

Benefits: Such a system would encourage Medicaid beneficiaries to shop for inexpensive insurance policies and voluntarily limit their use of services. It also would foster competition among health care providers, reduce opportunities for fraud and abuse, and greatly reduce the size of the state’s Medicaid bureaucracy.

  • Limit eligibility for Aid to Families with Dependent Children to two years. No other social aid program allows people to receive benefits for an unlimited length of time. We recommend that Illinois adopt a plan similar to Wisconsin’s “Work, Not Welfare” program, which requires welfare recipients to find full-time work or enter a job training program within 30 days of applying for assistance.

Benefits: The two-year limit would encourage people to acquire job skills and seek employment opportunities. It also would discourage the break-up of families, the conception of illegitimate children, and intergenerational dependency on welfare .

  • Transfer DCFS’s caseload to private groups. Only recently has DCFS attempted to assume guardianship over so many at-risk children, with disastrous results. Private agencies, such as Catholic Charities of Chicago, are willing to assume responsib ility for the placement of most at-risk children in Illinois.

Benefits: By tapping the considerable expertise and resources of private charities to house and care for at-risk children, DCFS can better focus its energies on setting policy and overseeing the program. The current effort to do both plainly ha s been an expensive failure.

  • Contract out CMS-provided services. CMS provides a wide range of support services to other agencies of state government. Many of these services have been privatized successfully by other state governments and by local governments in Illinois an d elsewhere.

Benefits: Expected savings from contracting out services range from 8 percent to 59 percent. Privatization also produces equivalent or improved service quality and greater accountability to the legislature.

We believe the average Illinois voter would prefer that the growth of state spending be slowed rather than face higher taxes. Our study of the state’s budget shows where spending growth could be restrained. Responsible candidates can take a “no tax increase” pledge during this Fall’s election campaigns, and they can honor this pledge during either a two-year or four-year term. We hope many of them will.

Joseph Bast is president of The Heartland Institute. This essay is based on a 62- page Heartland Policy Study titled “How to Win Illinois’ Battle of the Budget,” by Michael Finch, Joseph Bast, and Patrick Foys, available from The Heartland Institute.