Follow the Yellow Brick Road

House Speaker Michael "The Wizard of Oz" Madigan has spoken, and the Rod "The Wicked Witch" Blagojevich's Gross Receipts Tax is dead. Even if The Witch can't admit it yet.

The Wizard has also made it very clear that some sort of tax increase is headed out of the House, noting at various times recently that he doesn't think that a zero-growth budget is in the cards and that a tax increase seems inevitable.

So, where exactly are we headed? No one knows for certain what Madigan's thinking, except that he has announced that House Democrats will meet this Tuesday morning to discuss an "alternative tax plan."

Here are some things that could be on the table:

Corporate and Personal Income Tax Increase - $3.4 billion
The Civic Committee of the Commercial Club of Chicago (a big business group) has recommended an increase in both the personal income tax of 1% and corporate income tax rate by 1.6%, while the Center on Tax & Budget Accountability (largely union-backed) has recommended 2% and 3.2% respectively. These increases would generate $3.4 billion to $6.8 billion. Because a veto from the Governor is promised, House Republicans will have to be in on the deal, so if this is part of it, expect $3.4 billion.

Sales Tax on Personal & Entertainment Services - $1.7 billion
This is another area where there is common ground between The Civic Committee and CTBA, with the Civic Committee recommending a $2 billion expansion and CTBA a $2.2 billion. State Rep. Jay Hoffman has been kind enough to offer an exhaustive list of what would be taxed under HB 750. The Governor has taken special exception to the tax on hair cuts (insert Blagojevich joke here), without noting that every state around us also taxes haircuts. I expect some of the proposed service niches to be shelved for political reasons or due to the skill of their lobbyists. Just note, however, that businesses tend to offer less resistance to sales taxes because they are transparently paid by consumers, while the state allows the retailers to keep a significant portion of the tax. Municipal governments, too, get a piece of the action. Still, I'd expect this would be scaled back at the end of the day (taxes on haircuts and funerals), but I'm betting it could still bring in $1.7 billion.

Expand Gambling - $2 billion + $1 billion one-time
Legislation sponsored by State Rep. Lou Lang to create four additional Casino licenses, expand gambling slots at existing casinos, and allow slot machines in racetracks has already cleared the House Gaming Committee. Lang says the measure would bring in $3 billion the first year and $2 billion in additional years. The new casino licenses would go to Waukegan (Read: Senator Terry Link), the south suburbs (Read: Senator Emil Jones), O'Hare airport (Read: State Rep. Skip Saviano) and the City of Chicago (Read: Mayor Daley). Gambling is, as CapitolFax's Rich Miller puts it, "a tax on people who can't do math," while lawmakers who support it call it a "voluntary tax." While previous gambling proposals have often collapsed under their own weight, if Madigan puts it into legislation, it will pass. Senate President Emil Jones has wanted this for years, Senator Terry Link, who is credited for picking up two new seats for Democrats in Lake County, has wanted this for years, and Mayor Daley has wanted this for years. The problem for Madigan is that he doesn't want to leave our next Governor (Read: Lisa Madigan) with budget problems, and gambling revenues tend to flatten out pretty quickly, while the state budget grows with inflation. Gambling can and likely will be part of the mix, but it will never be the whole answer.

Closing Corporate Loopholes - $300 million
As Madigan noted during floor debate on the Gross Receipts Tax, he was one of 23 lawmakers that supported efforts by the Governor to close six corporate tax "loopholes" a couple years ago, to the tune of $300 million. Capitol regulars privately snickered of course, because there was little doubt if Madigan had been earnest about closing those loopholes, the bill would've gotten more than 23 votes. Madigan of course didn't want to be blamed by the Governor for standing in the way at the time, and two years later we see once again just what a chess master Madigan is. The fact that Madigan has resurrected the idea of closing loopholes now -- at a time when business groups can see their are much worse alternatives -- leads me to believe this will be part of the deal.

Alternative Minimum Tax - $400 to $500 million
Those looking to bring the governor on board are floating the idea of a Gross Receipts Tax on businesses that would be much more targeted than the Governor's proposal. How much revenue would be generated depends on where the cut-off is; the Governor has repeatedly blasted companies with more than $50 million in gross revenues that pay no taxes, so that seems like a likely target. House Majority Leader Barbara Flynn Currie pointed out in a speech to the Taxpayers' Federation of Illinois that corporations are only paying about $500 million less in corporate income taxes now than they were in 1980, so I'm using that number as the likely tab of an Alternative Minimum Tax.

I'm skeptical about the AMT for a few reasons. First, the Gross Receipts Tax by any other name is still a Gross Receipts Tax, and lawmakers who vote for it could still be nailed for voting for "Governor Blagojevich's Gross Receipts Tax." Secondly, it generates very little revenue compared to the political price, and lawmakers would still have to include expanded gambling, increased income tax, or expanded sales tax to make a dent on our budget woes, all three of which the Governor has previously said he'll veto. Third, Madigan mentioned during floor debate that taxing companies on gross receipts rather than reported income is a dramatic shift in tax policy, so he doesn't appear to keen on the idea.

And finally, the Illinois Constitution makes it clear (Article IX, Sections 2-3) that any form of a Gross Receipts Tax could be unconstitutional, and is certainly likely to be challenged. Section 2 requires corporate income taxes to be uniform, Section 3 prohibits a graduated corporate income tax rate and says that there can only be one form of income taxes on businesses. The GRT could be used to replace the corporate income tax, but any type of corporate income tax PLUS GRT/ATM appears to be prohibited.

Still, as long as its still floating around out there, I'll keep it alive for discussion.

3% Payroll Tax - $1 Billion
This idea has gotten very little attention, mainly because its tied to the Governor's "Illinois Covered" proposal. I think "Illinois Covered" is as dead as the GRT, and no lawmaker has yet to come out in support of a payroll tax of 3% on all businesses with 10 or more employees. Still, let's not forget it.

Sale/Lease of Lottery - $10 billion one-time, minus $650 - $1.2 billion per year
Next to the GRT, the plan to sell the lottery in exchange for more money for schools is probably the politically dumbest thing floated by the governor in the last year. Anyone involved in school funding debates over the last two decades knows that you don't put "lottery" and "education funding" in the same sentence. The idea got an ice cold reception from lawmakers on both sides of the aisle, as well as editorial boards.

The Gov has since retooled his idea slightly, calling for the one-time revenues generated from the sale/lease to go directly to a one-time reduction in state debt. That makes it politically more pallatable for budget hawks, but other problems remain. Chiefly, the Lottery currently generates $675 million a year for education, an amount that is expected to grow steadily to $1.2 billion over the next 20 years, so any sale of the Lottery creates a hole in the education budget that must be filled. In addition, GenTech, a client of Blagojevich fundraiser John Wyma, has already been identified as one of the companies most likely to bid on the lease -- and was even exempted from the GRT if it got the contract. Madigan is unlikely to hand such a windfall to a Blagojevich ally, so any measure allowing the sale/lease of the Lottery is likely to contain language similar to HB 1 that would prevent one of the Governor's campaign contributors from getting the contract.

A NOTE TO POSTERS: I'm sure lots of you are thinking that we are getting the cart before the horse when we talk about raising taxes before we talk about reducing spending. I hope to have a thorough outline of some of the spending proposals and cost-cutting proposals later this week, but given that this revenue discussion will be taking place tomorrow, I wanted to outline some of the things that will be on the table. Feel free to e-mail me with your cost-cutting or spending ideas.

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AFSCME endorses GRT, is AFL-CIO next?

From the Governor's Office:

CHICAGO – Governor Rod R. Blagojevich today welcomed the support of the American Federation of State, County and Municipal Employees (AFSCME) for his ambitious proposal to reform Illinois’ tax system, which closes corporate loopholes and brings greater stability to the state’s fiscal future. The Governor’s plan to establish a Gross Receipts Tax (GRT) on commercial activity has been embraced by many economists because of its broad base and low rates....


....“We believe it is critically important to ensure that the Illinois tax system is fair, stable and produces adequate revenues,” said Henry Bayer, Executive Director of Council 31. “Governor Blagojevich’s proposal for a Gross Receipts Tax meets that test on every count. Contrary to the claims of some in the business community,” Bayer said, “we believe this plan has the potential to provide a real boost for the Illinois economy. We intend to do all we can to help enact it.”

As CapitolFax reported earlier, AFSCME's lukewarm reception to the GRT was standing in the way of an AFL-CIO endorsement of the GRT. That obstacle appears to have been removed now. I doubt an all-out push from the AFL-CIO is all that far behind, especially since former AFL-CIO head Margaret Blackshere chairs the committee paying for all of the Governor's t.v. ads.

What does the AFSCME endorsement mean?

Although it's a small step, the AFSCME endorsement could result in a giant leap if the leash comes off the AFL-CIO. Full engagement of the AFL-CIO means it will be difficult for Speaker Madigan to act as the lone stopper for the Governor's plan, sans a viable alternative.

The ball is now solidly in the court of the business community, represented by the Illinois State Chamber of Commerce, Illinois Manufacturer's Association, Illinois Retail Merchant's Association, Chicagoland Chamber of Commerce, and the Civic Federation.

If Illinois, Inc. truly believes that the GRT is as devastating as they say, they need to offer an alternative route for all of the public pressure in favor of funding education, property tax relief, and to a lesser degree, health and human services.

Madigan can only dam up public demand for so long. Illinois, Inc. needs to stop merely sticking their finger in the dike, stonewalling, and offering up red herring arguments (like the one that says we shouldn't do anything without rolling back pension benefits, which, by the way guys, I'm sure helped Rod get AFSCME on board. Way to go.)

If Illinois, Inc. can't get behind HB 750, or some compromise version thereof, they need to offer up their own reasonable, politically viable, compromise solution to the budget challenges facing the state. Otherwise, GRT is coming.

From The American President:

Lewis (Michael J Fox): People want leadership, Mr. President, and in the absence of genuine leadership, they'll listen to anyone who steps up to the microphone. They want leadership. They're so thirsty for it they'll crawl through the desert toward a mirage, and when they discover there's no water, they'll drink the sand.

President Shephard (Michael Douglas):Lewis, we've had presidents who were beloved, who couldn't find a coherent sentence with two hands and a flashlight. People don't drink the sand because they're thirsty. They drink the sand because they don't know the difference.

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Sun-Tzu and the GRT in Illinois: Part II

A commenter asked an interesting question in my earlier post:

"I'd be curious what Sun Tsu has to say about disloyal lieutenents.[sic]"

Sun-Tzu has some very interesting things to say about loyalty. First, he makes it clear that loyalty is something that is continually earned by leaders, not foisted upon them.

There are three ways in which a ruler can bring misfortune upon his army:--

(1) By commanding the army to advance or to retreat, being ignorant of the fact that it cannot obey. This is called hobbling the army.

(2) By attempting to govern an army in the same way as he administers a kingdom, being ignorant of the conditions which obtain in an army. This causes restlessness in the soldier's minds.

(3) By employing the officers of his army without discrimination, through ignorance of the military principle of adaptation to circumstances. This shakes the confidence of the soldiers.

But when the army is restless and distrustful, trouble is sure to come from the other feudal princes. This is simply bringing anarchy into the army, and flinging victory away.

To put this in political context in Illinois:

(1) Adopt an unwinnable political strategy, and your political troops cannot deliver for you, no matter how good they are.

(2) Ignore the fact that a political operation can't be run like a state bureaucracy (and visa versa), and your political troops will lose morale.

(3) Try to run the next political battle like you ran the last one, ignoring reality, and the folks on the ground -- who can see it isn't working -- will lose faith in your leadership.

Lose enough unwinnable wars, crush the morale of your supporters, and squander their faith, and you have created a political vacuum; politics, like all of nature, abhors a vacuum, and those most likely to step into that vacuum are those who have stood close to you and watched you do 1, 2 and 3.

And what advice does Sun-Tzu give to field commanders who's rulers insist on doing 1, 2 or 3?

VIII. VARIATION IN TACTICS

Sun Tzu said: In war, the general receives his commands from the sovereign, collects his army and concentrates his forces.

When in difficult country, do not encamp. In country where high roads intersect, join hands with your allies. Do not linger in dangerously isolated positions. In hemmed-in situations, you must resort to stratagem. In desperate position, you must fight.

There are roads which must not be followed, armies which must be not attacked, towns which must be besieged, positions which must not be contested, commands of the sovereign which must not be obeyed. (emphasis added)

There is a time and place for discipline and obedience, but show me a campaign manager who follows the direction of her/his candidates -- or even supervisors -- without question, and I'll show you a campaign manager who loses alot of campaigns.

I've found that the best political leaders (or leaders of all sorts) are the ones who create an atmosphere for decision-making that encompasses the input of their lieutenants on the ground; once the best course of action is reached through consensus, then, and only then, does the campaign move forward with monolithic and awe-inspiring certainty of victory. But that is a future discussion from another book.

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GRT and The Art of War in Illinois

There are three books I consider required reading for all policymakers, political activists, and political junkies. The Art of War is first on the list (I'll talk about the other two soon). First not because it takes pre-eminence over the other two, but because it's the most venerable, and because so many folks make reference to it without ever actually having read it. And this is a book that bears re-reading.

I was reminded of Sun Tzu today by CapitolFax. Those of you who subscribe to CapitolFax (if you don't subscribe, you really should pony up the $30 a month) know that CapitolFax founder/political reporter par excellence just spent several intimate days with Governor Blagojevich on his statewide bus tour. Based on his time spent with the Governor, Rich Miller offered up his analysis of the Governor's persona as someone who is always itching for a fight. [Editor's note: if you want to read what Rich Miller says, you need to subscribe]

Sun Tzu would not be impressed with the Governor's gladiator mentality. The ancient strategist, mandatory reading in all military officer courses through out the world (Hitler allegedly based his Blitzkrieg attack on the writings of Sun Tzu), offers us this surprising pearl of wisdom:

"To win a hundred victories in a hundred battles is not the highest excellence; the highest excellence is to subdue the enemy's army without fighting at all."

The Governor has also made it clear in many statements to the press that he's willing to drag out this fight over the GRT as long as necessary, and expend great resources -- political capital, state staff time and resources, even his own political funds and those of his allies. Sun Tzu warns against this exhaustively, but the clearest passage is this:

"When you engage in actual fighting, if victory is long in coming, then men's weapons will grow dull and their ardor will be damped. If you lay siege to a town, you will exhaust your strength.

Again, if the campaign is protracted, the resources of the State will not be equal to the strain.

Now, when your weapons are dulled, your ardor damped, your strength exhausted and your treasure spent, other chieftains will spring up to take advantage of your extremity. Then no man, however wise, will be able to avert the consequences that must ensue.

Thus, though we have heard of stupid haste in war, cleverness has never been seen associated with long delays.

There is no instance of a country having benefited from prolonged warfare."

We see this happening now. While Blagojevich's hopes of passing his original GRT have passed, and his dream of passing any form of the GRT grows dimmer every day. Meanwhile, he's been weakened politically, and his top ally Senate President Emil Jones becomes increasingly weakened by the lack of progress on electric rates and fractures within his caucus over the GRT. At the same time, Speaker Madigan and Lt. Governor Pat Quinn are growing in strength, without actually expending any of their original resources at all.

The top beneficiary of the Governor's extended anti-business campaign, ironically, is the Illinois State Chamber of Commerce. While the State Chamber is spending money and resources on organizing opposition and t.v. ads, I'm betting that their fundraising is far outpacing their expenditures. GRT has also giving them a new-found relevancy in state politics, after a period of dormancy. A new tool for organizing local businesses and expanding their base. And a key ally in the Illinois Press Association.

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Governor's Tax Relief, Education Spending Still Not Good Enough

Thanks to CapitolFax, we now know that the Governor's Gross Receipts Tax has been sugarcoated with $1 billion in property tax relief. I say sugarcoated because the Governor's proposal provides only a fraction of the tax relief included in House Bill 750. And while Blagojevich still hasn't made the details of how his property tax relief plan would work, my bet is that he will be following President Jones' edict that property tax relief only goes to low-income families.

A property tax relief plan that fails to recognize that skyrocketing property taxes have hurt middle class families and Illinois employers is a failure in my book.

The two plans compared:

Blagojevich Gross Receipts Tax:

$1 billion in property tax relief, targeted to low-income families

• Only 9.2 percent of Illinois families are below the poverty level, and an estimated 50% or more of them rent and would not receive property tax relief;
• No property tax relief for middle class families;
• No property tax relief for employers.

House Bill 750:

$2.7 billion in property tax relief to every homeowner and employer in Illinois

• Every homeowner and employer receives a 20% - 25% rebate on their property tax levy for local schools;
• Property tax relief is spread across the state:
• 15% of property tax relief goes to Chicago;
• 27% of property tax relief goes to suburban Cook County;
• 32% of property tax relief goes to Collar Counties;
• 24% of property tax relief goes to Downstate Illinois;

• Property tax relief offsets net increase in corporate income taxes, so that Illinois employers see a net decrease in direct taxes paid by $100 million.

$900 million in additional direct tax relief for bottom 60 percent of family taxpayers

• Expansion of Family Tax Credit is fully refundable;
• Ensures low-income renters enjoy tax relief;
• Guarantees that bottom 60% of all taxpayers will see no net increase in tax burden.
  

At the end of the day, the Governor's plan calls for $8.6 billion in new taxes, with only $1 billion in tax relief, for a net increase in taxes of $7.6 billion. Funding for K-12 classrooms will increase $1.5 billion the first year, bringing foundation level funding to schools 6% below recommended levels. Higher education will see a meager $50 million increase.

House Bill 750 generates $9.05 billion in new taxes, but provides $3.6 billion in tax relief, for a net tax increase of only $5.45 billion, or 30% less than the Governor's plan. House Bill 750 provides $3.9 billion for K-12 classroom instruction in the first year -- 260% more than the Governor's plan, bringing the foundation level funding for schools up to 100% of recommended levels. In addition, HB 750 provides $300 million more for higher education, 600% more than the Governor's plan.

In the final analysis, only 20% of the net new spending in the Governor's plan goes to education, while 72% of House Bill 750's net new spending goes to education. Granted, this doesn't include new spending on school construction, and I'll post comparisons of both school construction plans as soon as they are available.

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