Who's the REAL Republican?

Lately, Governor Blagojevich has found great diversion by attacking House Speaker Michael Madigan for acting like a Republican for having the chutzpah to oppose his budget proposals.

What are the Governor's budget proposals that Madigan has opposed?

• The $7.5 billion Gross Receipts Tax, which even Emil Jones and the Governor's top staff admit would have been passed on to working families in the form of higher prices on everything from gasoline and groceries to auto purchases and home sales;
• Privatizing the Lottery, a state agency;
• Increasing state debt by issuing bonds;
• A massive expansion of gambling, which would enrich state government insiders at the expense of the poor and working class.

So, the Governor wants to balance the state budget on the backs of working families, privative state government, drive the state into debt, and stuff money into the pockets of well-connected insiders.

Sounds like Blagojevich is the Republican to me.

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Is It Time For a Recall Amendment?

Given the Governor's high-profile bickering with state lawmakers, ongoing criminal investigations into his campaign, failure to resolve the state's energy rate crisis, and the fact that he sprung an $8 billion Gross Receipts Tax increase on the state without having given the plan a single mention during his multi-million dollar re-election campaign, one has to wonder how long it will be before a member of the General Assembly files a Constitutional Amendment to allow for the Governor's recall.

I'll admit, I was one of the many folks who found California's recall process a little chaotic and comical, and I'm not 100% sure that the same issues can be avoided here. It's also pretty clear that the stated reason for Gov. Gray Davis's recall - the California energy crisis - wasn't his fault, but was caused by the energy companies themselves.

Still, the real reason for Davis's ouster was that he was a self-centered, vindictive tyrant who couldn't get along with lawmakers, even from his own party. And it's not hard for even Democrats to make the case that Californians are much better off.

Sound familiar?

California's recall provision gives citizens 160 days to circulate petitions stating the reason for the recall -- which is not reviewable. The required number of valid signatures is 12 percent of the number of ballots cast in the previous election for the statewide candidate being recalled. In Blagojevich's case, that would still require more than 418,558 signatures.

A vote on the recall question would be held at the next regularly scheduled primary or general election, if within 180 days, otherwise on a date set by the Governor between 60 and 80 days from when the petition is certified.

The Governor would be removed by a simple majority of ballots cast and his successor would be selected by a plurality from a pool of candidates on the same ballot (no primary here).

Blagojevich and George Ryan present strong cases for at least giving voters the option of recall. Moreover, I think the mere possibility of recall ensures that the Governor plays nice with everyone else in the sandbox, and I have no doubt the Governor would be a little more ready to negotiate with lawmakers and sense greater urgency on the electric rate issue if a recall was hanging over his head.

What are your thoughts:

Should Illinois allow recall?

How should Illinois' recall provisions differ, if at all, from California's?

Do you think a Constitutional Amendment could garner the required 2/3 vote in both chambers? Who should sponsor it?

What grounds would you give for recalling Blagojevich?

Do you think a petition drive could garner the necessary signatures?

Would the recall succeed, and who would you like to see as Blagojevich's successor?

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Now is the time for the General Assembly to define and implement Tax Fairness

The debate on implementing tax fairness just opened up.

I think there's a fairly firm consensus in the General Assembly that our tax system is unfair. We tax people in poverty too much and we do not tax our state's largest corporations and wealthiest individuals nearly enough. Middle-class people probably are taxed a bit too much as well, particularly those in low-wealth communities.

The Governor has put tax fairness at the center of this year's session, rightfully pointing out that the corporate income tax is essentially broken as it lets the biggest corporations off the hook.

He hasn't pointed out that our 3% state income tax with a low personal exemption and a low earned income tax credit means that people who make six figures pay a smaller percent of their income in state and local taxes than people who make 40 grand or less. That's backwards and this is the month to change it.

The question before each Member of the General Assembly is how to change it.

The Governor's proposal to implement a tax on the gross receipts of the largest businesses in Illinois has largely been rejected as, in the Speaker's words, a “regressive” tax. The House, by the way, deserves credit for taking the Governor's proposal seriously with an eight-hour hearing before the entire House. That high-level policy debate is the crux of transparent governing and we should have more of it. Why can't the Governor appear before a joint session of the General Assembly every month for a British-style Question Time? That would be fun.

One of the most illuminating exchanges was between Representative David Miller and Governor Blagojevich, after the Governor said that any income tax increase – no matter how progressive -- is “off the table” as he would veto it, Representative Miller matter-of-factly reminded the Governor that the General Assembly could simply override the veto. The Governor's response: I'll campaign against any income tax increase next year! Why? Because “it's wrong.”

Here is the worst aspect of the Governor's position: he rejects, vilifies and obfuscates the existence of a progressive income tax. The absolute best way to reverse our regressive taxes is to raise income taxes on high incomes (personal and corporate) and lower taxes on low incomes. This is not difficult to do.

Our state Constitution does require a non-graduated income tax rate, which is why we have a flat rate of 3%. The Governor's position has been that this provision of the Constitution precludes any sort of progressive income tax – but that's just not true.

It would be great if we could have a federal-style income tax where the first $15,000 of income isn't taxed at all, and the next $40,000 of income is taxed at 15%, and the next $60,000 of income is taxed at 28% and then income above $250,000 is taxed at 35%. But, we don't.

What we can do, however, is raise the rate on all income to 5%. That would raise the revenue from the people who have it the most, won't miss it at all, benefit from the Bush tax cuts and (crucially) can write-off the higher state income tax they pay off of their federal returns so that the state as a whole will pay less in federal taxes.

What about people who make less than $50 grand – or people who make less than $15 grand? If we raise the income tax rate to 5%, they will pay more too, and that's the reason why the Governor thinks it is wrong to raise the income tax. There is an easy way, however, to make sure that the middle class and the poor do not pay more in income taxes in order to satisfy the Governor.

That's to raise the personal exemption to $10,000. It's current $2100. Or in other words, cut a $500 check per exemption to every taxpayer instead of what we do now which is cut a $63 check per exemption to every taxpayer (3% of $2100). That exemption is essentially meaningless.

For people with not a lot of money, $500 off of taxes is a lot. And it's probably enough to wipe out any tax they might owe: you have to earn $10,000 per person in order to owe anything (since 5% of $10,000 is $500). So a family of four wouldn't pay any state income tax at all if they earn less than $40,000. And lots of legislative districts have an median family income of less than $40,000. That is about the average family income in our state.

Compared to our current state income tax which hits people as soon as they earn $2100, a $10,000 personal exemption even with a 5% income tax would make most people better off, particularly as they have more exemptions to take (that is, kids).

Here's how it works with one exemption (look for the blue highlight to see the break-even point):

Gross family income	Number of exemptions	Deduction	Value of exemption	Adjusted income	Rate	Tax
$10,000.00	1	$2,000.00	$2,000.00	$8,000.00	0.03	$240.00
$20,000.00	1	$2,000.00	$2,000.00	$18,000.00	0.03	$540.00
$30,000.00	1	$2,000.00	$2,000.00	$28,000.00	0.03	$840.00
$40,000.00	1	$2,000.00	$2,000.00	$38,000.00	0.03	$1,140.00
$50,000.00	1	$2,000.00	$2,000.00	$48,000.00	0.03	$1,440.00
$60,000.00	1	$2,000.00	$2,000.00	$58,000.00	0.03	$1,740.00
$70,000.00	1	$2,000.00	$2,000.00	$68,000.00	0.03	$2,040.00
$80,000.00	1	$2,000.00	$2,000.00	$78,000.00	0.03	$2,340.00

and now here is with a higher income tax rate (5%) and a $10,000 personal exemption.

Gross family income	Number of exemptions	Deduction	Value of exemption	Adjusted income	Rate	Tax
$10,000.00	1	$10,000.00	$10,000.00	$0.00	0.05	$0.00
$20,000.00	1	$10,000.00	$10,000.00	$10,000.00	0.05	$500.00
$30,000.00	1	$10,000.00	$10,000.00	$20,000.00	0.05	$1,000.00
$40,000.00	1	$10,000.00	$10,000.00	$30,000.00	0.05	$1,500.00
$50,000.00	1	$10,000.00	$10,000.00	$40,000.00	0.05	$2,000.00
$60,000.00	1	$10,000.00	$10,000.00	$50,000.00	0.05	$2,500.00
$70,000.00	1	$10,000.00	$10,000.00	$60,000.00	0.05	$3,000.00
$80,000.00	1	$10,000.00	$10,000.00	$70,000.00	0.05	$3,500.00

For people who earn less than $20,000 – that's $10 an hour with a full-time job, and remember our state's minimum wage is only $6.50, and remember, about a fifth of the entire state's population earns less than $20,000 a year – they are better off under a 5% state income tax with a $10,000 exemption than they are under a 3% state income tax with a $2,000 exemption. This is about the break-even point, so anyone who makes more than $20,000 as a single filer would pay more under the change.

Let's skip ahead to people with two exemptions and watch the break-even point rise dramatically. People with two exemptions include married couples and single parents with one kid.

Here is the status quo:

Gross family income	Number of exemptions	Deduction	Value of exemption	Adjusted income	Rate	Tax
$10,000.00	2	$2,000.00	$4,000.00	$6,000.00	0.03	$180.00
$20,000.00	2	$2,000.00	$4,000.00	$16,000.00	0.03	$480.00
$30,000.00	2	$2,000.00	$4,000.00	$26,000.00	0.03	$780.00
$40,000.00	2	$2,000.00	$4,000.00	$36,000.00	0.03	$1,080.00
$50,000.00	2	$2,000.00	$4,000.00	$46,000.00	0.03	$1,380.00
$60,000.00	2	$2,000.00	$4,000.00	$56,000.00	0.03	$1,680.00
$70,000.00	2	$2,000.00	$4,000.00	$66,000.00	0.03	$1,980.00
$80,000.00	2	$2,000.00	$4,000.00	$76,000.00	0.03	$2,280.00

And here is a more progressive income tax at a 5% rate and a $10,000 exemption.

Gross family income	Number of exemptions	Deduction	Value of exemption	Adjusted income	Rate	Tax
$10,000.00	2	$10,000.00	$20,000.00	-$10,000.00	0.05	$0.00
$20,000.00	2	$10,000.00	$20,000.00	$0.00	0.05	$0.00
$30,000.00	2	$10,000.00	$20,000.00	$10,000.00	0.05	$500.00
$40,000.00	2	$10,000.00	$20,000.00	$20,000.00	0.05	$1,000.00
$50,000.00	2	$10,000.00	$20,000.00	$30,000.00	0.05	$1,500.00
$60,000.00	2	$10,000.00	$20,000.00	$40,000.00	0.05	$2,000.00
$70,000.00	2	$10,000.00	$20,000.00	$50,000.00	0.05	$2,500.00
$80,000.00	2	$10,000.00	$20,000.00	$60,000.00	0.05	$3,000.00

Now we're at $40,000 of family income for a family of two (where just under half the population lives). That's a $20/hour job. Not bad and getting tougher to find as our manufacturing jobs are disappearing and service jobs rarely pay that much.

Here everyone with two exemptions who makes less than $40,000 is better off with a higher
tax rate (raising taxes!) and a higher personal exemption than they are today. Anyone who makes more than that will pay more.

Let's skip to the comparison for four exemptions (a married couple with two kids or a single parent with three kids):

Gross family income	Number of exemptions	Deduction	Value of exemption	Adjusted income	Rate	Tax
$10,000.00	4	$2,000.00	$8,000.00	$2,000.00	0.03	$60.00
$20,000.00	4	$2,000.00	$8,000.00	$12,000.00	0.03	$360.00
$30,000.00	4	$2,000.00	$8,000.00	$22,000.00	0.03	$660.00
$40,000.00	4	$2,000.00	$8,000.00	$32,000.00	0.03	$960.00
$50,000.00	4	$2,000.00	$8,000.00	$42,000.00	0.03	$1,260.00
$60,000.00	4	$2,000.00	$8,000.00	$52,000.00	0.03	$1,560.00
$70,000.00	4	$2,000.00	$8,000.00	$62,000.00	0.03	$1,860.00
$80,000.00	4	$2,000.00	$8,000.00	$72,000.00	0.03	$2,160.00
$90,000.00	4	$2,000.00	$8,000.00	$82,000.00	0.03	$2,460.00

Now, with a more progressive income tax (even with the Constitutional flat rate)

Gross family income	Number of exemptions	Deduction	Value of exemption	Adjusted income	Rate	Tax
$10,000.00	4	$10,000.00	$40,000.00	-$30,000.00	0.05	$0.00
$20,000.00	4	$10,000.00	$40,000.00	-$20,000.00	0.05	$0.00
$30,000.00	4	$10,000.00	$40,000.00	-$10,000.00	0.05	$0.00
$40,000.00	4	$10,000.00	$40,000.00	$0.00	0.05	$0.00
$50,000.00	4	$10,000.00	$40,000.00	$10,000.00	0.05	$500.00
$60,000.00	4	$10,000.00	$40,000.00	$20,000.00	0.05	$1,000.00
$70,000.00	4	$10,000.00	$40,000.00	$30,000.00	0.05	$1,500.00
$80,000.00	4	$10,000.00	$40,000.00	$40,000.00	0.05	$2,000.00
$90,000.00	4	$10,000.00	$40,000.00	$50,000.00	0.05	$2,500.00

90 grand! That's the break-even point!

Everyone who makes less than $90,000 in family income with four exemptions pays less with a 5% income tax rate and a $10,000 exemption than they do today.

That's a lot of middle-class (and upper-middle-class) families in both D and R districts.

This is just to show that a progressive income tax is very possible and can cut taxes for lots of
low-income and working people who are paying too many taxes now because we don't tax high incomes and corporations enough.

That's how it should be.

There are other important ways to make our tax more fair -- increasing the earned income tax credit and either closing corporate tax loopholes or instituting an alternative minimum corporate income tax or even perhaps a gross receipts tax that only affects the highest grossing corporations.

But for those of us who believe in a more progressive tax, we have a challenge that so far we have not really met and that is to explain to each Member of the General Assembly exactly how each of these low-income tax cuts (a higher personal exemption of the earned income tax credit) actually works to deliver tax cuts to the people who need it most.

Tax policy is not intuitive or obvious and unless we do a better job showing Members exactly how taxes are not progressive now and how to make them more progressive, we are unlikely to overcome legislators' natural inclination against raising taxes. And ultimately, our task is to convince voters that they stand to benefit from raising taxes on incomes above their own as it is often too much to ask Members to get ahead of their voters.

This is the crux of the communications challenge: we need to convince lower-income voters (who usually have less education) that raising taxes on high incomes while cutting taxes on lower incomes is good for their bottom line. We need to convince voters that progressive tax policy is the best rural economic development and inner-city economic development the state can possibly offer – because it is.

750, the twin bills in the House and Senate that raise the income tax to 5%, expand the sales tax to include services and invest the revenue in education, human services and pension payments, also holds harmless lower incomes from the higher taxes. This is a great step and right now 750 must be considered the leading proposal before the General Assembly.

One problem, however, is that the low-income tax cuts in 750 (the Family Tax Credit) are neither obvious nor simple to explain. The Family Tax Credit is, as I understand it, a tax credit off of the higher state income tax that compensates for both the expected higher sales tax and the higher income tax that lower-income residents would pay. There is a worksheet that calculates the size of the credit based on income and exemptions which will result in everyone making less than $50,000 or so paying the same amount under 750 than they do today with a 3% income tax and a non-service sales tax.

The concept is sound and deserves to be at the center of the debate, but there are two potential improvements worth considering. One is that the bill essentially asks legislators to trust that the Family Tax Credit will work, as the mechanism is not clearly explained (for every $2,000 of income, how much is the Family Tax Credit worth?). The second is that instead of cutting taxes for those earning less than $30,000 or so, 750 keeps the tax burden the same. 750 makes our tax more progressive by raising taxes on people making more than $50,000 or $60,000 or so, which is good (since our state's long-term economy is suffering from a low-tax and thus low-investment status, particularly in education and transportation), but does not make progress on the other side to cut taxes on low-income people which would do the most good to our economy (as low-income people spend locally almost all the money they save unlike high-income people who invest their money in global vehicles like mutual funds or second homes).

This is the month to build on the Governor's campaign for Tax Fairness in the General Assembly. Let's seize it!

[cross-posted at djwinfo]

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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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High-Dollar Puppeteers

Our researcher Shannon has a good post over at Wonkish on the forces behind the big businesses groups raising hell in the state right now over the Governor's Healthcare/Education/Gross Receipts Tax proposal. She posed a fundamental question: Who does the State Chamber of Commerce represent?

The answer: Big Business. Well, not just big business. Big Out Of State Business.

The Chamber’s wallet is filled by multi-billion dollar corporations from out of state that have financial interest in Illinois - the same type of corporations Blagojevich claims have been skirting paying their share of taxes for too long. Take a look below at the Chamber’s main contributors (those who contributed over $5,000), and you will see some notable characters - Ameren, Harrah’s. Who among these would be most affected by the Gross Receipts Tax, and how much money are they willing to put up to stop it?

Now, we won't know who is funding the state chamber's current radio ad blitz and promotional tour around the state, but it is sure to be a similar cast of characters. Obviously, from a policy perspective, these corporations have a definite interest in defeating any proposal that shifts more responsibility toward their businesses. Additionally, being out of state, they won't benefit from any of the other items in the budget.

But, by donating to the Illinois Chamber, do these businesses taint that operation? Any effort by the Chamber to claim the mantle of defending small business becomes woefully transparent.

I'll put my question simply: Does it hurt the Illinois Chamber's argument to be associated with devil incarnate... er... Ameren right now?

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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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GAS!!!.....................Receipts Tax

The Illinois Petroleum Marketers Association has finally gotten into the gross receipts tax debate in a big way.

From Dixon, IL:

"For the everyday person to understand how the proposed tax would affect them, they need look no further than the gas pump. According to the Illinois Petroleum Marketers Association and the Illinois Association of Convenience Stores, Blagojevich's original 0.5 percent GRT would cause the price of gas to go up by over four cents.

According to Bill Fleischli and Dave Sykuta, who represent the IPMA and the IACS, the Gross Receipts Tax will add at least four to 10 cents-a-gallon to the cost of motor fuel in Illinois. The trucking industry, agricultural community and Illinois citizens will pay between $144 million dollars and a quarter of a billion dollars a year in additional taxes on motor fuel."

(Emphasis added)

Raising gasoline taxes by as much as $250 million a year? This is a message that could seriously resonate in rural and suburban Illinois, especially if they manage to break that number down into "average household." Thanks, Illinois Press Association.

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Transportation taxes in the GRT?

Well Rich was nice enough to provide the link to the GRT so I started taking a look and I found this interesting bit at page 12 (of the pdf starting at line 4)

(8) Gross receipts from the sale of transportation
services by a common or contract carrier, in proportion to
the mileage traveled by the carrier during the taxable year
on roadways, waterways, airways, and railways in this State
to the mileage traveled by the carrier during the taxable
year on roadways, waterways, airways, and railways
everywhere;

As I read it, and remember OneMan is neither an attorney nor an accountant so I may be wrong. It sounds like that any shipping that moves in this state even if it does not start here or end here is going to be subject to the gross receipts tax for a portion of the fee paid to ship something in relationship to how much of the journey crosses Illinois.

Using just using a 'trucking' definition this in some ways is going to be an accounting nightmare, let's say I ship something from Davenport, IA to Gary IN is the 'mileage traveled' based as the crow flies or actual road miles within Illinois?

What if I am shipping between two points outside Illinois but the item goes into a hub within Illinois? Is the shipper then liable for tax for the mileage within the state? Does 'common or contract carrier' include outfits like FedEx? If so than this is going to get really interesting because of the hub system they and other use.

It also looks like we are now going to be taxing the shipment of grain via barge.

Finally if 'common or contract carrier' includes airlines and bus companies, this gets even more interesting.

I may be completely reading this section wrong, if so let me know.

More at OneMan's Thoughts

OneMan

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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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Black business and the gross receipts tax

Last week we saw the Governor rally support amongst black religious leadership. It seems obvious that at said press conference the ministers are for this tax-fairness plan and the Governor's programs for affordable health care and education. We see one segment of this population what about those blacks who owns businesses.

Well for the most part I saw opposition. Unfortunately no group is totally monolithic since I see that the governor has the support of another group of black business owners...

“The Illinois State Black Chamber of Commerce and its membership embraces the ideas of the Governor's plan to invest in Illinois families by providing access to affordable healthcare for small businesses and all Illinois residents, increasing funding for our schools, and creating a tax system that is fair for businesses and families alike. The State Black Chamber of Commerce agrees with the Governor that ‘the need is clear and the time is now,’ and that is why we are committed to working with the Governor's office to get the General Assembly's support so that we may create a fair and equitable system that levels the playing field, reduces the burden on middle class families, helps small and mid-size businesses become more competitive and lessens the tax burden on all Illinois residents,” Illinois State Black Chamber of Commerce President/CEO Larry Ivory said.

OK but what are those opposed to the tax fairness plan are saying anyway? From Crain's...

While ABLE formally decided to further review the matter and to examine a possible “alternative solution” to the state’s financial needs, President Hermene Hartman says the organization in fact opposes the proposal.

“We appreciate the governor’s desire to close corporate loopholes” in the existing tax structure, said Ms. Hartman, CEO and publisher of the Hartman Publishing Group, which produces N’Digo and Savoy magazines. “But making all business pay for the loopholes when we didn’t benefit from them is a mistake.”

Ms. Hartman is even more direct in a column posted on N’Digo’s Web site, which says passage of Gov. Blagojevich’s proposal as written will mean “the end of the entrepreneur” in Illinois.

Hmmm, what about this column by Hermene Hartman? Well here's a little taste of what she said in the aformentioned column...

The thought is that there are corporate tax loopholes favoring big business, so much to the point that some of the largest companies in that state are tax-exempt. The gross receipts bill is an attempt to correct that, and indeed it should. The tax excludes small business with revenues of $1 million or less. This sector represents the cottage industry, personality businesses, and ma and pa shops. These types of businesses usually do not employ more than three people. Everybody else pays.

The state has redefined “small business.” What happens to federal regulations that define small business? For the most part, small business is under $50 million or has “size standards.” Most businesses under a million in revenues do not hire, and are very small operations. The governor’s bill hurts small business enterprises that hire most employees and represent the fastest growing business sector.

For every million dollar for a professional service business, the proposal asks for 1.8 percent of gross receipts. That represents $18,000 per million. This is unfair. Essentially some companies will pay taxes on monies that might be passed through.
...
The entrepreneur is a special case, and I should hope along the way there is a separation between the entrepreneur business and the corporate business. There is a drastic dynamic distinction to be made. The entrepreneur is a small business working on his own steam, and is usually a niche type business with limited resources, bootstrap strategies, and in the case of the minority, limited access to working capital.

The comparisons are limiting. Why should the local neighborhood grocery store pay the same taxes as Jewel and Dominick’s? The small grocery will probably never grow to the heights of the Jewel. Why should the small boutique business be charged the same tax as the Michigan Avenue super store?

The point is, they shouldn’t. It is an unfair business comparison and an unfair business tax.

If this tax is passed in its present state, it is the end of the entrepreneur. The concept of small business needs to be reconsidered. A consideration should be given to grading business — small business, entrepreneur, corporate, and mega businesses. The margins of these businesses are drastically different. It is one thing for the Wal-Marts of the world to have a 5 percent margin, and another for the small grocer to have a 5 percent margin.

Entrepreneurs, as they exist in the State of Illinois, are on the way to extinction if this tax is enforced as it is currently stated. By the time you pay income tax, state tax, federal tax and payroll taxes, it just isn’t worth it. The entrepreneur’s operation is stifled, and literally the various governments become hidden business partners that most do not want.

Entrepreneurs are literally going to be penalized for being in business. It is unfair for the government to place the schools and health industry on one sector of society — the business community.

So she is going to bat for the entrepreneur here. And these are good points, but take a look at her recommendation and that includes raising the income tax. An income tax that she says hasn't been raised in 40 years...

Bite the bullet. Increase income taxes 1 percent for all citizens. This is the fairest tax of them all.

People who have children in school should be taxed differently than those who
have no children.

Tax businesses based on size.

Graduate the taxes by considering size of standards. Tax big businesses differently than entrepreneurs, different than small businesses, different than professional services.

Eliminate taxes. If you are paying gross receipts taxes, eliminate other taxes.

Equalize state business. Minority businesses receive a fraction of state business and should be taxed accordingly.

Minority businesses should be taxed based on opportunity in the market place, and with a formula access to capital.

Small businesses should be exempt from taxes for the first five years of existence.

Have business people assess government waste to improve efficiency, and perhaps there would be a need to increase taxes.

Have the gross tax receipt deductible from federal taxes.

I think these points right here are some good points for discussion. I hear a lot of bellyaching perhaps we can look at some alternatives.

Addendum: More information from that Crain's article...

But business groups generally have charged that the governor’s proposal instead will hurt them by raising costs too high, and many comments at the March 15 ABLE meeting were in that vein.

For instance, according to a copy of meeting minutes, Leon Finney of the Woodlawn Organization said his and many other black-owned companies would be directly affected by the new levy and that the state perhaps should look for another way to raise money.

“The tax provokes a certain amount of concern,” Mr. Finney confirmed in a subsequent interview. “It’s small companies that provide most of the jobs that drive our economy. . . .We agree with the goals that the governor set (for schools and health insurance). The question is, how do you get there.”

Becky Carroll, Gov. Blagojevich’s deputy chief of staff and spokeswoman on budget matters, conceded that ABLE gave the governor’s plan a “mixed reaction,” but said that it indicates “a willingness to learn more about the plan before making any rash decisions.”

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GRT gets headlines while Madigan plays with HB750

Phil Kadner at the Daily Southtown has the scoop that I haven't seen anywhere else.

The Illinois House of Representatives Committee on Appropriations -- Elementary and Secondary Education is expected to hold a public hearing today on House Bill 750.

This is a measure that would change the way public schools are funded by increasing the state income tax from 3 percent to 5 percent....

Lots of good stuff in his column. Last year Speaker Madigan didn't let this tax increase go anywhere even after a Senate committee approved it. Now he's apparently allowing a House committee vote on it, which should raise more than a few eyebrows. Blago's gross receipts tax and new 3% payroll tax are horrible, but HB750/SB750 is also bad.

Not that I think they are smart enough to pull it off, but it almost looks like Madigan and Blagojevich are working together to make sure some form of tax increase is passed this year. Blago proposing the awful gross receipts tax sure does make HB750/SB750 look a lot better in comparison and sets HB750/SB750 up to be a compromise. Watch your wallets and call your Reps.

If it's voted on in committee today I'm going to be very curious to see how Republican Reps. Eddy and Prtichard vote, both of whom have not ruled out support of an income tax increase.

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Shake down the Hoosiers?

Via One Man's Thoughts,

Essential products and services - Given the historic policy of maintaining access to food and pharmaceuticals, the retail sale of food and pharmaceuticals to Illinois residents [Baar's emphasis] will not be subject to gross receipts tax. In addition, state Medicaid payments to practitioners will also be exempt from the gross receipts tax, providing an incentive for doctors and dentists to enroll Medicaid-eligible patients.

So grandma visits from Florida and we take her to Lalo's and she pays GRT and I don't? We have to show our drivers licenses as proof? What about illegals? Or Hoosiers?

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The Idea Shop on Democrat's Gross Receipt Tax

The Idea Shop sees fodder for Econ Grad Student studies,

This whole episode is pretty disappointing—a true victory of politics over intellectual honesty and sound policy. No economist worth her salt would ever recommend a GRT over the many, many good alternative ways of raising revenue that don’t lead to the hidden economic distortions of GRTs. Yet the Illinois governor’s office forges ahead, selling a widely discredited tax structure to the public as a tax on “business” rather than people.

This turgid resistance to the advice of economists is a remarkable thing to see first hand. As communicators, economists have a lot of work to do.

On the plus side, this wave of new GRTs promises plenty of good data on their economic drawbacks in about a half-dozen years. Watch for some terrific applied public finance work in about 2017.

Update: from an earlier Idea Shop post,

A note for trivia buffs: gross receipts taxes made a famous appearance in Ayn Rand’s Atlas Shrugged—remember the scene when central planner Wesley Mouch hits Colorado with a 5 percent gross sales tax, somewhere around page 250? The tragicomedy of bad tax policy continues. Read the full piece here.

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Bill Brady Rolls Out StopRod.org

State Senator Bill Brady has borrowed a page from his colleague State Senator Dan Rutherford by setting up an internet-based campaign to oppose Governor Rod Blagojevich’s tax hikes.

Rutherford did it before he ran for Secretary of State, concentrating of the fees that were imposed during Governor Blagojevich’s first year in office. I especially remember getting emails attacking the unfairness of sewage treatment fees imposed by the Illinois EPA.

Brady is attacking a larger target—the Democratic Party governor’s 6 billion Gross Receipts Tax.

Here is his press release:

Sen. Bill Brady (R-Bloomington) today launched a new website – StopRod.org – to give Illinois citizens an opportunity to learn how Governor Blagojevich’s massive new tax increase may affect them and to register their opposition to it.

“This is the largest proposed tax increase in the history of Illinois,” Brady said.

“I think it is important that consumers and businesses alike know they face higher costs and bigger government if the Governor somehow pushes this through the Democrat- controlled General Assembly. This is the governor again sticking its hands into the pockets of every business and every consumer in Illinois, to the tune of $6 billion just to pay for programs the state cannot afford today.”

“This is a tax that everyone who is concerned about the long-term economic security of Illinois should oppose. Illinois already is the eighth-worst job producing state in the nation, thanks to the Governor’s anti-job policies over the last four years.
With these new taxes, even more Illinois businesses will shut their doors or move across the stateline, and the financial vitality of Illinois families will be even more threatened,” Brady added.

No state funds are being used to support the new website, which is being paid for by Brady’s political committee, Citizens for Bill Brady.

Brady came in third in the Republican Party primary for governor in 2006.

First posted at McHenry County Blog.

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So the tax may depend on where you are from?

The Trib has the budget document as a PDF

On Page 32 of the PDF there is a set of actions intended to 'mitigate any unintended economic consequences'

"Given the historic policy of maintaining access to food and pharmaceuticals, the retail sale of food and pharmaceuticals to Illinois residents will not be subject to gross receipts tax."

So if you sell someone food or pharmaceuticals you have to ask them if they are a resident? That's the way I read it, if a drug store in Calumet City fills a prescription for someone from Indiana it is subject to the tax? Same thing if someone buys a burger in downtown Chicago at a hotel? Oh you are from out of state, I have to pay tax on that. If I am understanding this right, it is going to be a management nightmare.

Much more on the gross receipts tax at OneMan's Thoughts including some insight into the impacts on health care providers.

OneMan

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