RESEARCH Business Government
ILLINOIS ECONOMY
Illinois should enact short-term tax hike to address budget deficit

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

6/1/02

Photo by Bill Wiegand Economist J. Fred Giertz is calling for a temporary income-tax hike until the state budget crisis passes.

CHAMPAIGN, Ill. — With Illinois facing a growing budget deficit, the governor and legislature should bite the bullet and agree to a temporary income-tax hike until the crisis passes, a scholar says.

"The problem is now so severe that it cannot and should not be addressed solely by budget cuts," writes J. Fred Giertz, an economist at the University of Illinois at Urbana-Champaign. A noted state tax expert, Giertz called a temporary increase in the income-tax rate "a simple and efficient way" to close the budget gap. But while simple, a temporary tax hike would not be easy for politicians to accept in an election year, he acknowledged in a paper published by the Institute of Government and Public Affairs.

State revenues for the fiscal 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. The problem, in turn, is having a dramatic impact on the 2003 budget being hammered out by Gov. George Ryan and leaders of the General Assembly.

Giertz proposes 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 about $700 million in spending cuts, the budget deficit could be closed without depleting the general funds balance, raiding the state's "rainy day fund" or causing long delays in the payment of state bills, a method used when Illinois faced its last budget crunch 10 years ago.

On the other hand, hacking more than $1 billion out of the budget, as proposed in some quarters, would "create severe and unnecessary hardships" by hurting state education and reducing state aid for the poor and elderly.

Giertz also expressed worry about permanently increasing various "vice" taxes, such as on cigarettes and gambling, or modifying the corporate tax by decoupling it from recent federal changes. "These 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 - 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.