Little new ground in the Governor’s budget address

The Illinois Senate chamber. Randy von Liski/Flickr

Governor Bruce Rauner delivered his budget address to a joint session of the General Assembly yesterday. The speech broke little new ground, and repeated some long debunked myths. CTBA is combing through the details of the proposed budget, and will be providing more in-depth analysis over the next few days and weeks.

In the meantime, some points in the Governor’s speech deserve comment.

The first is that the Governor has proposed a budget with a $4.57 billion deficit — at a time when the state is projected to begin the next fiscal year with as much as $13.5 billion in unpaid bills. Even discounting that backlog, nearly $1 of every $5 the Governor proposes to spend on General Fund services is not paid for. In the image of the Governor’s budget below, you can see the “Budget Basis Operating Surplus” (we’ve marked it with the first red arrow), which shows the $4.57 billion deficit. In the next line, however, under “Other Sources,” the Governor has written “Working together on a grand bargain” (the second arrow) — which produces, without detail, exactly $4.57 billion in savings, thus creating a balanced budget.

This is a tactic that the Governor has used before: proposing unbalanced budgets with lines that suggest unspecified future reforms to even things out. The unspecified reforms did not occur, and each of the last two fiscal years ended with multibillion dollar deficits.

One of the most glaring inaccuracies in the speech was that Illinois has the nation’s fifth largest state and local tax burden. This ranking comes from a Tax Foundation report that includes taxes paid to other states. If you look only at taxes actually collected by governments in Illinois, then our state ranked just 27th in state and local tax burden as a percentage of income in 2014 — slightly below the median. And 2014 was before the phase-down of the temporary income tax increase; if our income tax had been what it is now, CTBA estimates Illinois would have ranked 37th, tied with Idaho and Texas.

The Governor also claimed that government spending must grow more slowly than economic growth. CTBA addressed this claim, which has no clear policy basis, on our blog when the Governor made it during his State of the State address earlier in the year. As we wrote then:

According to the Bureau of Economic Analysis, Illinois’ GDP grew by 1.8 percent in 2015. However, at the same time, Illinois cut all General Fund spending by 9.2 percent from FY2015 to FY2016. (Spending on General Fund current services-education, healthcare, human services, and public safety, as opposed to payments on things like debt-was cut by 18.3 percent.)

In other words, the conditions the Governor is demanding already exist: our poor economic growth is far outpacing the growth in government spending, which is actually falling.

The problem is not with the rate of government spending. The problem is that our revenue system is outdated and creates a permanent structural deficit. Until we address the revenue side of the fiscal ledger, Illinois will not be able to cut or grow its way out of the deficit.

Much of the Governor’s address was focused on economic growth as the solution to the state’s fiscal woes. The Governor repeatedly said that job growth was the key to his budget, but offered few concrete ideas for how to do that. CTBA agrees that in the long run, a healthy growing economy is crucial to fiscal stability. However, in the short run the most important thing is to have sufficient revenue to pay for the core public services like education, healthcare, social services, and public safety that Illinoisans depend on — and which in turn create an environment conducive to economic growth.

To the extent the Governor did address ideas for job growth, he implied that lower taxes lead to increased growth. However, the research shows there is no statistically meaningful correlation between tax policy and job growth. States like California and Minnesota have seen tremendous job growth after substantial income tax hikes, while Kansas is in economic disarray after massive tax cuts.

The Governor was very specific when he talked about revenue cuts or which revenues he will not increase, but was very vague about how he would increase revenue. CTBA is a proponent of broadening the sales tax base, but the Governor provided few details of how he might do this.

From CTBA’s issue brief, “Expanding the Base of Illinois’ Sales Tax to Consumer Services Will Both Modernize State Tax Policy and Help Stabilize Revenue.”

The Governor was similarly vague when talking about reforms to public pensions. Based on media reports, it appears the Governor is still looking to cut the pension benefits of current public employees, a solution that the Illinois Supreme Court has overruled in the past as unconstitutional. Illinois does not have time to spend on another unconstitutional pension initiative that will ultimately be struck down by the courts.

The Governor’s demand for a permanent property tax freeze is not sound fiscal policy either. Freezing the main revenue source for local governments and public education will cause severe strain in communities across the state. Indeed, such an initiative would make it virtually impossible for communities to maintain adequate levels of such basic services as police and fire protection. This is an especially questionable proposal now, given that recent state law imposed a significant increase in pension funding requirements on local governments that will continue to grow over the next two decades.

CTBA applauds the tone of the Governor’s budget address in seeking solutions rather than further political fights. However, the Governor provided little in this speech that can be used by leaders in the General Assembly to craft a meaningful resolution to the ongoing budget impasse.

We’ll be taking a closer look at the Governor’s FY2018 budget proposal and providing a more detailed analysis over the coming days and weeks — and when we do, we’ll post our analysis at the Budget Blog.

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