PUBLICATIONS Inside Illinois Vol. 21, No. 22, June 20, 2002

Illinois should enact short-term tax hike to address budget deficit

By Mark Reutter, News Bureau Staff Writer
(217) 333-0568; mreutter@illinois.edu

Photo by Bill Wiegand Fred Giertz, Illinois Economist

With the state facing a serious budget crunch, the governor and Legislature should have taken the high road and passed a temporary income-tax hike until the crisis passes, an Illinois scholar says.

J. Fred Giertz, a UI economist and noted state tax expert, advocated the temporary increase as "a simple and efficient way" to close the budget gap. But a temporary hike proved too politically charged for Gov. George Ryan and the legislature to even consider in an election year.

Instead, the General Assembly last week finalized a state budget that will raise cigarette taxes and exact sharp reductions in fiscal 2003 outlays, including a $89 million cut for the University of Illinois system.

Revenues for the current year ending June 30 are likely to fall $1.4 billion short of the $25 billion that was expected at the beginning of the year. "Mid-year expenditure cuts made in response to the revenue shortfall have fallen far short of addressing the problem," Giertz wrote in a paper published last month by the Institute of Government and Public Affairs.

Giertz advocated a temporary two-year increase in the state income tax from 3 percent to 3.25 percent, with a comparable increase in state corporate taxes. For a family of four, this would amount to about $100 in higher taxes per year.

"Such an increase would generate approximately $800 million per year for two years," he estimated. Together with spending cuts, the budget deficit could be closed without causing undue hardships for poorer families, raiding the state’s "rainy day fund" or delaying the payment of state bills, including year 2001 tax refunds to state residents.

Giertz expressed worry about permanently increasing "vice" taxes, such as raising the tax on each pack of cigarettes by about 40 cents. "These and other changes may or may not be desirable, but they should be considered on their own merits, not as stopgap measures to respond to the state’s temporary budget problems."

And that is the silver lining, according to Giertz – the current budget crisis is not expected to last long as the economy shows signs of renewed activity.

Giertz pointed to the stock market "dot-com bubble" as an important contributing factor to the budget woes. Much of revenue added to state coffers in recent years did not come from permanent gains in general household income, but from windfall capital-gains taxes of top earners.

When these stocks imploded, the revenue that state forecasters had anticipated from wealthier households also was wiped away.

But the Illinois scholar also faulted Springfield for not reining in government spending during the flush years.

"Spending growth continued apace in fiscal 2001 and 2002 even as revenue growth slowed," he said in an interview. "The governor and General Assembly can rightly be faulted for approving an overly optimistic budget for fiscal 2002, though, in their defense, the magnitude of the revenue shortfall in recent months has been far greater than experts either inside or outside government foresaw."

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