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Wednesday, Sept. 24, 2008 10:58 am

Time for tax reform in Illinois

There’s no need for budget crises in a wealthy, low-tax state

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Now that the Illinois General Assembly has acted to restore Gov. Rod Blagojevich's budget cuts — using a one-time-only gimmick to supposedly fund the deficit — it's time to get serious about state revenues to prevent this budget brinksmanship from happening again. Even now the governor says revenues are going to fall short of what was predicted a few months ago, and the nation's financial crisis threatens to make the state's income even worse.

There is an obvious solution: raising the income tax. House Speaker Mike Madigan has said it is the right thing to do, though he's keeping quiet about it now. In fact, throughout the budget battle hardly a word was said about a long-term solution. A month before the election, lawmakers are content to let Blagojevich set the agenda with band-aids and short-term fixes.

Illinois, the fifth most populous state in the nation, ranks 33rd in the amount of income tax it collects per person: $732. Missouri gets $822 and Ohio $875 per person, while Iowa collects $892, according to the state Commission on Government Forecasting and Accountability (COGFA). If Illinois collected the nationwide average per capita income tax amount, $882, its budget woes would disappear.

The income tax could be made more just at the same time it is increased. Changing the tax would also present an opportunity to refine our rather primitive tax structure, because Illinois remains one of only seven states with a flat tax, and Illinois has the lowest rate among those seven flat-tax states. Here everyone, rich and poor, pays just three percent, the same rate that has been in effect for 15 years. Most states ask those with higher incomes to pay higher rates. In Missouri, for example, those in the lowest tax bracket pay just 1.5 percent, while those in the highest income category pay 6 percent.

In Illinois, state taxes from all sources take just 5.7 percent of personal income, ranking us 43rd among the states. "While Illinois is one of the lowest taxed states in terms of state revenues, it is one of the highest taxed states in terms of local government tax revenues," says COGFA. The commission suggests, gently, that state government "needs to take up a larger role in financing programs and institutions throughout the state, which would lessen the burden on local governments." School funding is the most obvious category where the state needs to play a larger role.

Having low taxes in Illinois should pay dividends by attracting businesses and jobs to the state, right? One would think that as the state's ranking for overall taxes goes down, its "business climate" ranking would go up. "Companies will locate where they have the greatest competitive advantage," says The Tax Foundation, a Washington-based watchdog group. "States with the best tax systems will be most competitive in attracting new businesses and be the most effective at generating economic and employment growth."

But Illinois, while groaning under the stress of lacking money to pay its bills, fails to receive the expected payoff for low taxes — more businesses and jobs. The Tax Foundation ranked Illinois a dismal 28th among the states in its Business Tax Climate Index. While this state won points for its low income tax, it scored low on other factors included in the ranking: its corporate tax, sales tax, property tax, and unemployment insurance tax. All these areas offer more opportunity for comprehensive tax reform. An increase in the income tax could make way for relief in other areas. The result could be an improved business climate.

Illinois is wealthy in people, jobs and income. It makes no sense for state government to act poor. This fall, after the election, would be a good time for the state to put its house in order, with a serious effort to increase the income tax and make it more fair, while adjusting some of the burdens on business and local government.

Fletcher Farrar is editor of Illinois Times.

Contact him at ffarrar@illinoistimes.com.

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