A Penny's Worth of Wisdom
The state's sums fail to add up—again
July 16, 1992
Perhaps the fundamental obstacle to better state government in Illinois is an obdurate public that demands services for themselves but expects everyone else—who?—to pay for them. Jim Edgar was more responsible than most in his budgeting, and I took care in this piece to note that budgets must be approved by legislators, and even a responsible governor must accept some bad ideas to get the few good ones approved. State budgets under both political parties thus lie about costs, foist as much of the tax burden as they can onto politically weak citizens, and, most ruinously, under-invest in ways that dooms their successors to the same fate.
The state's fiscal pain sometimes leads to good results, like the toothache that finally drives the procrastinator to the dentist. (The Department of Commerce and Community Affairs is a good example of what happens when government doesn't floss regularly.)
Generally, however, the new [State of Illinois] budget is a deplorable muddle. The proposals initially submitted by Gov. Jim "James" Edgar were praiseworthy as far as they went, apart from his prudish attitude toward taxes. The budget as adopted by the General Assembly alas was a seminar in subterfuge—"balanced" only by delaying a pension pay-in here, cheating on health insurance there. For years Republicans complained that lawmakers ought to budget government the way a family budgets a household. This our legislators have done. When the members tried to shift $21 million in pension funds it was like stealing nickels from Junior's piggy bank until payday.
The old phrase, "penny wise and pound-foolish" rather over-values the wisdom that the General Assembly put into this document. The small change saved by cutting two days off the Illinois State Fair schedule or reducing the hours at the Dana-Thomas House may actually cost the state money in lost tourism; meanwhile, money for the State Board of Education—Illinois' Pentagon, which builds increasingly expensive systems that work decreasingly well—was actually increased.
The legislators had no appetite for issues bigger than they are, so the larger questions about Illinois's ways of getting and spending were left unexamined. To be sure, the General Assembly faces constraints on its budget-making powers. Some obvious and sensible reforms are constitutionally problematic, such as banning legislators from Springfield in years not divisible by four. And big chunks of the budget must go to pay for massively expensive health programs such as Medicaid mandated by a Congress that has applied the EC's agricultural principles to medical care, warehousing commodities no one wants or needs (in this case old people) at enormous costs in subsidies.
The real constraint on the process is the political cowardice of the members. The exercise of this cowardice is, of course, why they are sent to Springfield in the first place. Voters do not expect lawmakers to craft a budget that will provide prudently for needed services to all the state's people, but to protect their constituents' individual or class advantages against the depredations of other individuals and classes.
As was noted by virtually every commentator, the slapped-together budget was adopted because this is an election year, and no ambitious lawmaker wants to go back home and have to explain that he did the right thing in Springfield. The middle class is impatient with spending for welfare, the public health, crime prevention, jails, or jobs training, since they don't need them. They do not countenance their elimination, however. Some social spending is needed to keep the poor and the criminals from becoming stroppy; the trick for a legislator is balancing a budget at that precise point at which middle-class anxiety about the have-nots equals middle-class anger over having to pay taxes.
Certainly since the late 1970s, the purpose of state government has been to conceal from its citizens the fact that they are going broke. This ambitious effort to preserve a tattered middle-class lifestyle in the face of world competition, inflation, and economic decline is expensive, and it has required our lawmakers to come up with ways to spend money without seeming to.
Consider the unbudgeted subsidies that flow to the middle class via the Illinois income tax system. State tax is paid on one's adjusted gross income as shown on federal tax returns. This means that income deducted from federal taxes also is exempt from Illinois income tax. A couple buying a $235,000 house in one of the state's posher suburbs with a standard 30-year mortgage charging 8.5 percent interest is thus able to reduce their Illinois taxable income by $20,000 by deducting their mortgage interest.
This reduction in turn reduces their Illinois income tax by $600. It is arguable whether a $600 a year subsidy is significant to a couple able to afford nearly a quarter-mill on a house, but that lost revenue might be useful to some of the many thousands of working class Illinoisans who are forced to pay a third, even half their monthly income on rent.
Employer-provided pensions and health benefits are also exempt from federal income taxes for those taxpayers (increasingly, upper-income types) who itemize. Virtually every working person receives such a subsidy, if only because an employer's contribution to the Social Security account of an employee is not considered income. As Social Security taxes have risen, so has the value of the exemption, and the cost to Illinois tax collectors; the employer contribution for a worker earning $50,000 a year gives the latter an additional $3,825 in income.
Nationwide, only about half of all workers enjoy employer-paid pensions, but their cost is subsidized by all taxpayers; since those pension contributions are not subject to the federal income tax, the resulting lost revenues must either be made up in other taxes, or be replaced by borrowed money whose interest is likewise borne by all taxpayers. Like home mortgage interest deductions, the amounts are not insignificant, and tend to rise disproportionately with income.
To the extent that Illinois's income tax system is pegged to the federal one, the former can be only as fair as the latter, which isn't very. From 1977 to the present the effective tax rates for bottom-end taxpayers rose nearly a third, while those for the upper end dropped by nearly a quarter.
It is often complained that Illinois has lost control of its budget as a result of mandated federal programs and so on. It is just as true that the state has lost control of—or more accurately, surrendered control of—its income as well. Decisions about equity, subsidy, and progressivity that affect who gets public funds and why in Illinois are made by Congress. This indisputably makes the state's revenue system easier to administer; a state that puts efficiency over fairness probably is just as well off to leave such decisions to someone else. ●