Thursday, April 12, 2007

Be Wary of New Friends

It is somewhat amusing to listen to groups representing multi-national corporations attack the gross receipts tax because it will hurt small businesses, discourage individual entrepreneurs, and be paid eventually by working families.

It reminds me of the debate on the inheritance tax when I was a member of the House of Representatives. My memory may not have the numbers exactly right but the argument being made against the tax went something like this: widows who didn’t know how they were going to pay for their next meal needed protection from a tax that exempted the first $650,000.

It is kind of the big guys to be so protective of the little guys, but one wonders what the facts are. Here are some to keep in mind.

The purpose of Governor Blagovejich’s proposal is to reduce the reliance of schools on the property tax and to extend health care coverage to working families that aren’t being covered by their employers and can’t afford to pay for it out of their wages. Without new revenue those goals will not be achieved.

Without question, the property tax is the most difficult tax for new and small businesses to pay.

Under any set of assumptions, working families will pay a smaller share of the gross receipts tax than any other alternative proposal that is being made.

The broad base and the low rate of the gross receipts tax, compared to other taxes, means that it will be spread more evenly and more fairly across all business sectors. The gross receipts tax is also simple and straightforward so it is not as subject to accounting manipulations as the corporate income tax, and is more difficult for multi-national corporations to avoid.

The Tax Foundation, out of Washington, DC, and aligned with big business, has expressed grave concern over the Illinois gross receipts tax. It has a marvelous example of a “hypothetical” small manufacturing company that somehow has its profits reduced by $10,000 as a result of the gross receipts tax even though it is too small to be subject to the tax. It seems that this small company has 30 suppliers all of whom are large enough to be subject to the tax, but none of whom pay any of the tax. Neither the sales or the profits of the 30 large companies are reduced by the tax, because they all pass the tax on to the one small company at the end of the production chain that ends up in the “hypothetical” example paying the tax for all 31 companies.


The small company is put out front like the poor widow, both to divert our attention and draw our sympathy. But even in the Tax Foundation’s fictional account the one small company has a problem only because 30 large companies pass all their tax liabilities onto its narrow shoulders. How real is that “example”? We are supposed to believe that 30 companies large enough to be subject to the tax, don’t pay anything, while one small company, small enough to be exempt from the tax, has to pay the tax for all of them.

Everyone should have a friend like the Tax Foundation looking out for them!

What are the alternatives to the gross receipts tax being suggested by those who want to protect working families? A 5 percent tax on among other things, hair cuts, funerals, doing the laundry, and home repairs, and an increase in the personal income tax from 3% to 5%. Somehow those taxes are “better” for working families than the gross receipts tax.

Be wary of new “friends”.

21 comments:

Bill Baar 9:20 AM  

What are the alternatives to the gross receipts tax being suggested by those who want to protect working families?

Reform spending (and the corruption in Illinois contracting) first, is the alternative.

Otherwise it's robbing the working families without a gun...

...and they know it.

Skeeter 9:57 AM  

Bill Baar,

What specific spending cuts do you recommend?

JBP 1:32 PM  

"What are the alternatives to the gross receipts tax being suggested by those who want to protect working families?"

1) Sell McCormick Place
2) Sell the Tollways
3) Sell Illinois Beach State Park
4) Phase out early retirement for teachers
5) Eliminate the Illinois Healthcare Facilities Planning Board

Limit spending increase to the rate of inflation, and you could work wonders.

Bill Baar 1:55 PM  

Read Colin Hewit over at Illinos Policy review,

...Martire and other tax hike supporters have never made it clear how increasing tax revenues will solve our “structural deficit.” Illinois, like all states and many private companies, faces serious challenges securing its pension system for future generations because the basic structure is unsustainable. But HB 750 proposed nothing to change this structure.

Similarly, projected Medicaid costs pose serious challenges to the state budget. Illinois has refused to pass even basic reforms, like moving all enrollees to managed care, to make those costs more reasonable. Other states have actually taken action to address their Medicaid financing. Did HB 750 propose any “structural” changes to Medicaid? No.

Finally, HB 750 was pushed, above all else, as an answer to our state’s school funding woes. But here again the bill failed to offer any structural changes. It was supposed to achieve “equity” in school funding. It would have done no such thing. For Chicago - which would have received a lion’s share of new money - HB 750 did nothing to ensure the money would have distributed equitably within the city’s limits.


If you don't reform the structure, the added revenue is a joke. JP Powers lists some, Colin some for Medicaid...

But Check the Donuts and Theology post. As long as we've got pay-for-play going on among Illinois vendors, I have a tough time accepting any kind of tax increase until the Politicans can show me they've kicked this self-enrichment as public service.

Yellow Dog Democrat 2:25 PM  

Douglas, please let us know which set of assumptions the Blagojevich administration is using when it says that the Gross Receipts Tax won't impact consumers.

The latest projection I heard was that 45 percent of the now $7.5 billion tax increase will be passed on to consumers. That's a $3.4 billion tax increase on working families, but I'd love to know what your model says.

Yellow Dog Democrat 2:28 PM  

And Bill Baar, there is absolutely nothing that is unsustainable about our pension system. What is unsustainable is the Governor and the General Assembly's refusal to make scheduled payments. When we skip a payment, we end up having to make it up later, plus interest.

If Gov. Blagojevich can summon the mustard to make pension payments BEFORE creating new programs and obligations, the problem is solved. Unfortunately, to date it's been all hotdog and no mustard.

Anonymous,  3:14 PM  

The GRT is a crap solution. Many more people will be hurt than helped by it, if it even gets passed.

Of course I will pass along my increased costs to the consumer. Why should I cut my own throat and eat the whole tax increase by myself?

SKEETER,

I would have to look at the budget, but when it increases every year and still doesn't cover the basic needs of this state, then there is a structural problem with the states spending. Don't you think?

The biggest problems we face are bloated no bid contracts handed out to campaign contributors and a bevy of feel good, do nothing, unfunded fantasy programs which do nothing but attempt to raise the Guv's popularity.

Can the new crud and fix the old. That is something that hasn't been tried by this administration yet. Then clean out the army of unqualified, overpaid political appointees clogging the payroll. They have no idea what is going on and how to perform their "job". They just collect their paychecks.

JBP 3:39 PM  

"there is absolutely nothing that is unsustainable about our pension system."

Not to sympathize with Gov Blago, but a huge chunk of state spending is going to retired state workers, teachers, etc. Highway workers were retiring at age 48 when Blago came into office...some of the regular on this blog devised the schemes that perpetrated this mess.

Teachers retire at age 52 every day, with full benefits, and a pumped up salary to inflate their pension.

I don't have the numbers here, but I will guess that approximately 1/2 the amount spent on state payrolls is spent on retirees, via pensions etc.

JBP

Extreme Wisdom 3:42 PM  

YDD,

You are mistaken about the pension system. Blago certainly made it worse, but it was on the skids before the "holidays."

I've read that you blame some of this on the markets, and that too plays a part, but the fact is that you can't throw 1000s of actuarily impossible pension promises into the pool.

Take my District's former Superintendent. $85,000+ increase in compensation over 5 years, artificially jacking her pension to about 100% of her pre-"bonus" salary.

I know that a good chunk of these payments went to the TRS, but so what?

First, these people's salaries are inflated relative to their intrinsic economic benefit (A School Superintendent provides next to no economic value. 892 here, 75 in Florida, 1100 in Texas - pick a number, American Education still sucks)

Second, they faked run-ups basically converts a person providing next to no value to one retired and providing NO VALUE - for ABOUT THE SAME COST!!

Assuming that even ALL of the $85,000 went to the TRS, the retirees drain on the system far, far exceeds that paltry sum.

I guess the "good" news is that the pension debacle, once paid for through massive economic pain - will spell the end of the defined-benefit plan (as it should).

You can talk about government helping the poor all you want, the triple dipping, end-of-career bonuses, and general small minded rapacity of many on the public payroll is not only unsustainable, but repugnant as well.

You can't fund new "L" stations and lines, Children's Education, or clinics and doctors for the poor when all of it is going to unwarranted benefits for the bureaucratic class.

Skeeter 5:39 PM  

SKEETER,

I would have to look at the budget, but when it increases every year and still doesn't cover the basic needs of this state, then there is a structural problem with the states spending. Don't you think?

In response:

Not necessarily. Sometimes prices go up. Sometimes things were not properly funded before and still are not properly funded.

What remains, however, is the idea that it is very easy to say "CUT THE BUDGET" but it is very difficult to provide specifics.

JB's, of course, are ridiculous. Sell the tollways? Sell McCormick Place? That's his solution? That will net you $4 right there!

Anonymous,  7:04 PM  

Yes, costs do rise, but Rod was the one who said that his combining of many agencies and the hiring "freeze" would keep or reduce the expense of running the government.

Yet...

Anonymous,  7:18 PM  

The problem is that legislators and the governor can't seem to say no. And they don't look, agency by agency, to see what can be changed. For instance, where I work, we order a specific product that everyone uses. Every one of the agencies we serve is guilty of ordering too much, especially when it's a new item in the same category, it goes into the warehouses and hardly anyone uses it. So, since it's dated material, a year down the pike we are recycling it and there goes millions of taxpayers dollars. But the rank and file don't dare suggest a different route or we will be called on the carpet or fired for overstepping our bounds. Whatever the suits say is gospel, even if they are wrong.

Also, there needs to be a whistle-blower system that is anonymous. No one is going to risk his or her job by giving their name. This is a vindictive governing body. We have a man who does nothing but wander around the office and read and do puzzles. Everyone knows he doesn't work, but no one will report him because we would be identified.

If agency by agency was looked at for waste, goldbrickers and excessive staff and expense, it would be a good start to bringing down expenses.

steve schnorf 7:47 PM  

Our state pension system is neither overly rich, nor unsustainable. Pay close attention, now. The problem is the principal and interest payments on the more than $40 billion in unfunded liability.

Employees didn't create that problem. The richness of the benefit didn't create that problem. Insustainability didn't create that problem.

Some of you may not like state employees getting pensions. You may not like defined benefit plans. But those aren't the problem. We would be facing exactly the same problem today if we had a defined contribution plan, and the state had failed to make its contributions. Duh! By the way, the last time I checked, there had been no great abandonment of defined benefit plans among our peers; very large, highly unionized workforce employers.

Skeeter, people don't give you rational answers to the "where would you make the cuts?" question because there aren't rational answers.

Getting rid of the "corruption tax" of no bid contracts wouldn't even be a tiny drop in the bucket. Getting rid of another 10,000 employees wouldn't be much more. Remind yourself of why Willie Sutton robbed banks.

You have to cut Medicaid (which is inneficient because of the federal share), cut education funding, close mental health and corrections facilities, cut grants to community service providers, substantially reduce nursing home care eligibility, cut early childhood and subsidized child care, and more things like that. Our big problem besides the pension payments isn't what we spend on buying shit and salaries, it's what we pass through to others.

There will never be the political willpower among the officials you and I elected to make the cuts necessary to get us out of this problem

Anonymous,  9:20 PM  

schnorf,

We only need to be rid of one employee to save the state billions - Rod R. Blagojevich. He and his merry pack of morons couldn't govern a homeowners association, let alone a state the size of Illinois.


To disgusted,

I was wondering if these issues you mention with the "suits" has increased exponentially since, lets see, January 2003? It had where I was.

steve schnorf 9:55 PM  

Rastaman,

I can guarantee you that if Rod Blagojevich died tonite, it would not save the state billions. That level of understanding makes the whole discussion less than worthwhile, and therefore tiresome.

JBP 9:56 PM  

Steve,
"You may not like defined benefit plans. But those aren't the problem"

strikes me as delusional. Given the pension mayhem at GM and Ford, UAL, Delphi, American Axle, and pretty much other company with a defined benefit plan, driving some of the largest companies in the US to bankruptcy or livind dead status, can anyone actually say with a straight face that defined benefit plans are not a problem for the State just like they are for private business?

The "great abandonement" is being brought about by the massive de-unionization and/or bankruptcy of American Heavy Industry.

JBP

JBP 10:12 PM  

Skeeter,

ILGA and Credit Suisse has selling the tollways at $9.5 Billion valuation. Anyway you look at it, that is a significant amount of money.

JBP

steve schnorf 11:01 PM  

jpb,
to do an accurate analysis of our competing points of view, one would have to know what the state's acctuarily sound contribution would be this year under the current plan if there was no unfunded liabilty, and be able to compare it to the contribution that would be required under a defined contribution plan, and then add back in the more than $3.2 billion dollar payment due this year for the unfunded liability. Do you? Thought not.

JBP 8:07 AM  

No Steve,

I don't really need to know the exact number. There is overwhelming evidence that big industrials are in terrible financial shape due to retirment benefits (and demographics) just like the State is.

The functional technique that tends to work for defined benefit plans, places money out of the hands of corporate executives (in the case of Deere, CAT etc), and out of the hands of Gov Blagojevich in the case of the State.

If the Gov were to pinch money from defined contribution plans (like Access Air did in Des Moines/Peoria), it is most likely criminal and would certainly raise a huge stink among employees, the press, and the general public.

The structure of defined benefit plans passes on problems to future generations. By facing up to liabilities today, as is (pretty much) forced by defined contribution plans, the State would certainly be cornered in to consider its massive size and early retirement plans.

JBP

Anonymous,  12:20 PM  

And state employees have to have either a defined benefit or a defined contribution plan because....it is written? Where?

Better to pay them a little more now and have them set up and manage their own Roths or 401k investments just as so many of their colleagues in the private sector must. Many would likely prefer it.

Those same colleagues by the way must also pay for the comfortable to lavish pension benefits of their, well, less than competitive state employee counterparts.

It's not written anywhere. We can change it. Sure there would be transition costs. But ending the lavish state retirement system would relieve a huge financial burden on the kids and grandkids and it would be the right thing to do.

Extreme Wisdom 2:58 PM  

Anon,

Great point. The one thing that is "written" is that current benefits for retirees can't be lowered. It's in the Constitution, and it has to go.

Steve,

I posted the numbers on my former superintendent's lavish pay/pension package. This has been repeated 1000s of times across the state in every district and every municipality.

It it unsustainable. Don't debate me, debate the Civic Federation Numbers.

Certainly, having made the scheduled payments would have helped, but you simple can't ignore the fact that showering benefits on a class of people that produce dubious social value (sure, teachers certainly outperform adminsitrators) for nothing in return is a game that simply has to end badly.

JBP's ilustration of what has happened in the private sector is instructive.

Skeeter,

Don't be silly. Tolls and Lottery's are loaded with value, and the taxes they bring in prove it, as does the pricing JBP mentioned.

Further, if the sclerotic "in the Springfield box" thinking could ever be penetrated, intelligent people (you and Steve qualify) could easily devise solutions with out a tax increase.

I don't even have to go into my education idea. The tolls and lottery, if capable of generating $9.5 billion as a sale price, could easily be either leased, privatized, or even properly managed, and simply signed over to the pension funds for past "holidays" and full funding.

As for all those health care needs, a rational government would seek ways to treat people who couldn't afford care instead of drumming up absurd insurance schemes designed to pull people out of private plans and into the government orbit.

I can't speak for JBP, but I for one have no problem providing health care to people in need, just as I would gladly provide for ways to get a better education for Illinois disadvantaged kids.

The way I see it, OUR side of the aisle (creative thinkers) are proposing solutions and ideas and YOUR side of the aisle (static thinkers) is stubbornly and disingenuously dismissing anything that doesn't get your fat bureaucracies another 10 bites at the apple through an unnecessary and harmful tax increase (HB750 OR the GRT).

BTW Steve,

No one minds people (even government employees) getting pensions, including me.

Triple dipping (gaming the system so as to collect 2, 3 or 4 pensions) and actuarily unsustainable end-of-career bonuses are merely obscene abuses.

One betrays one's mindset when one defends them.

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