How We Can Solve the Budget Crisis in Illinois

By Rich Whitney, Green Party candidate for Governor of Illinois

Illinois now holds the distinction of having the worst budget crisis of any state in the nation.

This is a problem of titanic proportions, caused by years of irresponsible and improvident budgeting by both of the two corporate-sponsored parties and their representatives in Springfield – most recently under the control of the Democrats but with ongoing participation by Republicans. Even after Gov. Quinn cut the budget by $1.4 billion in early July – including cuts of $241 million to our schools, $100 million to our colleges and $312 million on human services — the “structural deficit” going into Fiscal Year 2011 will still be about $12.3 billion. That means spending will exceed revenues by about $12.3 billion – which means there will be $12.3  billion more in unpaid bills, additional cuts, and/or additional borrowing, which will in turn make it that much harder to balance the budget in future years.

I will fight to solve the State structural deficit problem and raise needed revenue in a fair and responsible manner, not push the problem off to future generations. For reasons stated in my larger economic platform, this is critical, not only because we have an obligation to balance the budget and pay our bills on time, but for the sake of our economic health. Unlike my opponents, I believe that a strong public sector — in the core areas of education, health care, public safety, infrastructure and social services – is not a drain on the economy but is essential for the productive areas of the private sector to flourish.

And if that were not reason enough to address the problem, then the massive human suffering we are seeing right now as a consequence of the crisis should provide ample incentive:  teachers and other workers being laid off, school class sizes rising and quality of education declining, health-care and service providers going unpaid or even closing their doors, college becoming increasingly unaffordable and offering less, and the most vulnerable members of society being abandoned.

We can solve the budget crisis through the following steps:

A. Eliminate spending that exists only to reward political supporters of favored legislators and that does not serve a legitimate public purpose.

B. Enact a comprehensive reform of our existing tax structure, which relies far too heavily on local property taxes to fund our schools and places too much of the burden on lower-and-middle-income working people.

C. Impose a financial transactions tax on speculative trading, making the financial sector responsible for much of the current economic crisis pay its fair share to repair the damage and promote economic health.

D. Create a state bank, in which to deposit our tax revenues, supplemented by funds from private depositors, so that the State of Illinois can invest in productive ventures that benefit the people of Illinois, and keep the interest collected for the benefit of the people, rather than pay interest to enrich the same private financial institutions that have already preyed upon workers, homeowners and taxpayers.

E. Implement a “fee and dividend” system on producers of energy and products responsible for greenhouse gas emissions and nuclear power. Fees would be imposed on the producers while consumers would receive quarterly dividends from the proceeds, based on their income level, that would provide protection from energy price hikes and allow a shift in spending in favor of clean energy and energy efficiency.

F. Raise additional revenue by ending the socially destructive “war on drugs” and specifically by legalizing and taxing the sale of marijuana.

Taking these in order:

A. Eliminate spending that exists only to reward political supporters of favored legislators and that does not serve a legitimate public purpose.

Although we cannot close a $12+ billion deficit primarily by making spending cuts – at least not if we want to restore and maintain adequate funding for core services – spending cuts do need to be part of the equation. There is still waste, inefficiency and payment of illicit political rewards in Illinois government, and we need to eliminate them if we are going to spend our resources more wisely on programs that genuinely improve economic opportunities. To this extent, I will make common cause with Republicans, Libertarians and independent conservatives who see elimination of waste and political patronage as a top priority. After all, we may disagree as to the appropriate role and scope of government but we all agree that it should be more efficient and aimed squarely at serving the public interest.

The idea that government is a kind of fatted calf, and that the main goal of each legislator is to get the biggest slice for his or her district, regardless of the effect on the rest of the state, is a sickness, destructive of the public good. Who better than a Green Party governor – with no stake in political patronage and no corporate largesse or PAC money to hand out to political supporters – to clean house and eliminate political hires, ghost jobs, inefficient administration and wasteful pork-barrel spending?

As governor, I pledge to:

● Convene an independent Citizens’ Budget Review Commission, drawn from both the private and public sector, and all parties, which will conduct a forensic audit of our operating and capital budgets. The Commission will be armed with the authority to subpoena witnesses and documents, to ferret out wasteful pork spending, ghost jobs, inefficient practices and expenditures – and any spending that does not serve a legitimate public purpose.

● Better publicize, expand and utilize the State Government Suggestion Award Board program that provides rewards for meritorious ideas that save the state money. Although the basic idea behind this program is good, it is practically unknown and few Illinoisans even know about it or how to participate.

● Review the “piglet booklet” prepared periodically by the Illinois Policy Institute and Citizens Against Government Waste to identify additional programs, projects, grants and contracts that are wasteful and should be eliminated. Although I disagree with many of the items that these organizations identify as “waste,” I commend them for their citizen initiative and work in scrutinizing the budget and do find agreement on some items. A Whitney administration will review their findings and act on those that have merit.

● Review and cut allocations from the recently passed Capital Bill that were clearly aimed at rewarding legislators and serve no legitimate or Senators serving on their boards. One grant was even awarded to a youth camp located in Wisconsin. Numerous handouts were awarded to religious organizations and/or serve no secular purpose. Numerous grants were for road expansion projects of dubious or no merit. If bonds for some of these projects have already been sold, I will fight for legislation to reallocate these funds to the Operations Budget or to pay down some of our state’s huge unfunded pension liability.

It is difficult to state with certainty how much money we can save through such initiatives. However, I will set as my goal saving $2 billion by these means.

B. Enact a comprehensive reform of our existing tax structure.

This is not a matter of “raising the income tax,” with no conditions. Although the state does need more revenue to fund essential programs, raising taxes on working people and small business owners will not help the economy recover. The crux of the problem is that Illinois has one of the most regressive tax systems in the nation, meaning that we tax lower-income residents more heavily than the wealthiest. In fact, when all taxes are combined, Illinois taxes the lowest 20 percent of income recipients at more than double the rate of the top one percent! A related problem is that Illinois relies far too heavily on property taxes to fund its schools – which has given us among the poorest funded schools and the most unequally funded schools in the United States. District-based property taxes also operate in a regressive manner, since poorer districts must assess at a higher rate in order to fund their schools.

Therefore, we need to implement tax fairness, and reduce the burden on lower-and-middle-income working people, including overburdened homeowners. What is needed is a whole package, taking an approach similar to current Senate Bill 750. That bill would raise additional revenue by raising the personal and corporate income taxes, and broadening the sales tax to include some services. However, it first protects lower and middle-income wage earners, by tripling the Earned Income Tax Credit and creating a Family Tax Credit for low and middle income taxpayers to offset the effects of the income tax increase and sales tax base expansion.

Another part of the tax reform package is that it must reduce reliance on property taxes to fund schools by increasing the state’s share of support for schools, thus allowing real property tax relief. SB 750 would do this by increasing the state’s per-student Foundation Level for K-12 education to the amount recommended by the Education Funding Advisory Board over four years (raising it to $8,410 from $5,959). The Foundation Level and state Poverty Grants would also be automatically tied to increases to the Employment Cost Index to adjust for inflation. It also requires increased funding for pre-school education, special education, grants for high-poverty schools, teacher and principal mentoring programs, science, math and technology programs, and mandates a $300 million annual appropriation (indexed for inflation) for grants to higher education.

The property tax relief would be implemented by doubling the Illinois residential property tax credit. Earlier versions of SB 750 provided relief by providing abatements paid by the state. Either approach is valid; the objective is to provide property tax relief without actually lowering the assessments and revenue streams at the local level. We must avoid a “shell game” in which increased state funding results in lower local funding. We want to improve school funding and reduce school inequality by raising the floor for all.

Implementation of SB 750 would yield an increase in revenue of $7.352 billion, going a long way toward eliminating the structural deficit.

Although I support SB 750 and would sign such a bill, two important qualifications are in order. First I would want to amend the bill to replace the Family Tax Credit with a more straightforward tax credit to be applied based on income without regard for family status. It should be strong enough to ensure that the lowest quarter of wage earners actually pay lower taxes than they pay now, with the next highest 40 percent paying no more in income taxes than they pay  now.

This will not only reduce the regressivity of our tax system; it will also provide economic stimulus. Dollar for dollar, any program that puts more money into the hands of the lowest-income workers tends to have a greater stimulative impact than a tax cut or any other type of expenditure. That’s because low-income workers spend a higher percentage of their income, creating a greater multiplier effect than money expended anywhere else.

Second, although expansion of the sales tax to cover consumer services may be a necessary evil now, the sales tax will be among the first things to go once we achieve fiscal health and can afford to get rid of it, beginning with food items and other essentials, and then abolishing it for everything except luxury items. The sales tax is notoriously regressive and it imposes an undue burden on many small businesses. Its abolition will be a high priority.

References: See the Center for Tax and Budget Accountability: http://www.ctbaonline.org/.

C. Impose a financial transactions tax on speculative trading.

Our economy has become increasingly dominated by the “finance, insurance and real estate” (or FIRE) sectors of the economy, the social usefulness of which is far outweighed by its tendency to prey upon consumers, more genuinely productive businesses and taxpayers. After the predatory activities of this sector created a speculative “bubble” that triggered the current economic collapse, it bought off enough members of Congress to soak the taxpayers for a record bailout, with an ultimate price tag of $14.4 trillion. Then they turned around and paid themselves another round of obscene executive bonuses for their “performance.”

This sector comprises a new class of “robber barons.” Congress is too bought and paid for to seriously challenge their power. But here in Illinois, through the Green Party and this campaign, we can start to make them pay their fair share of the wealth they have stolen and start to undo the tremendous damage they have caused.

The vehicle for doing so is a Financial Transactions Tax on speculative trading – trading that bears little relationship to the real productive activity of the economy. Specifically, I propose levying a tax on the trading of futures, options and interest rate products. The notional value of such securities traded on the Chicago Mercantile Exchange and the Chicago Board Options Exchange in 2008 exceeded $1 quadrillion. An extremely miniscule tax on such transactions – measured in terms of 10-thousandths of one percent, far less than the commission and brokerage fees most have to pay to make a transaction – could potentially raise enough revenue to eliminate the deficit in Illinois on its own.

However, considering the volatile nature of such trading, I propose a more modest beginning. I would propose that we levy a tax on such trading sufficient to raise $4.5 billion in new revenues for our State government.

At a time when the Illinois legislature repeatedly hits low-income workers disproportionately with “sin taxes” on alcohol, tobacco and gambling, a Financial Transactions Tax would impose a tax on another form of gambling, one that is every bit as harmful as the other sin taxes, and far more voluminous. Such a tax would also provide these added benefits:

● It would discourage manipulative and monopolizing behavior within the financial markets.

● It involves a transaction tax so small as to not affect those genuinely engaging in legitimate financial activities.

●It will help stabilize the derivatives markets which serve as product price insurance so  important to Illinois farmers.

References: See the Chicago Political Economy Group and its working paper on a Financial Transactions Tax nationally. http://www.cpegonline.org/. Also Mother Jones: http://motherjones.com/special-reports/2010/01/accountability-deficit

D. Create a state bank, in which to deposit our tax revenues, supplemented by funds from private depositors and state pension funds.

This will allow the State of Illinois to invest in productive ventures that benefit the people of Illinois, and keep the interest collected for the benefit of the people, rather than pay interest to enrich the same private financial institutions that have already preyed upon workers, homeowners and taxpayers.

While almost all states are struggling to balance their budgets like Illinois, one exception to the rule is North Dakota – the only state with its own bank. Instead of using state funds as a means to further enrich private banks, a state-owned bank could earn additional revenue for the state, while at the same time help spur economic development in Illinois. It could provide low-interest credit to Illinois-based businesses, farmers and college students. It could be used to finance  capital projects, modernize our infrastructure, promote green energy, energy efficiency and sustainable transportation, insulate homes and businesses and provide more affordable housing. It could help the state pay its bills during times of fiscal emergency. It could help moderate the effects of economic downturns by making credit more widely available at reasonable rates of interest. As needed, it would have the power to borrow from the Federal Reserve at the same nominal rate of interest as commercial banks.

A “Community Bank of Illinois” (“CBI”) would be the depository for all incoming state funds. The act authorizing the bank should require or at least encourage each of the state’s five public pension plans, with combined assets of about $50 billion, to deposit a modest percentage of their holdings in the CBI. Along with tax revenues and private deposits, this would ensure a sizable fund of start-up capital with which to begin operations relatively quickly. The CBI’s earnings, in turn, could be used to help alleviate our state’s huge pension fund deficit.

State Rep. Mary Flowers has introduced a Community Bank of Illinois Act, HB 5476, which proposes to create a state bank modeled after North Dakota’s. While I think there is room for improvement in the bill, it is a good starting point and should be applauded.

The fiscal impact of the CBI on the state budget would of course be limited at first. Even at its inception, however, it could be a useful instrument for lending money to the State government to deal with immediate crises. After that, it would not take long for it to have a measurable positive impact on our economy.

References: See the articles of Ellen Brown on this subject, at http://www.webofdebt.com/ and especially her blog, at http://webofdebt.wordpress.com/.

E. Implement a “fee and dividend” system on producers of energy and products responsible for greenhouse gas emissions and nuclear power.

While the federal government is debating whether to implement an ineffective “cap and trade” system to reduce greenhouse gas emissions, Illinois can get ahead of the curve by implementing a simpler but more effective greenhouse gas fee-and-dividend system. Under such a system, gradually increasing fees would be imposed on the producers of greenhouse gases, while consumers would receive periodic dividends from the proceeds, based on their income level, with progressively higher dividends going to persons at lower income levels, that would provide protection from energy price hikes and promote a shift in spending in favor of clean energy and energy efficiency.

The guiding principle is that those who are imposing such terrible costs on society should start paying the price for it, thereby creating an incentive for producers to transition to renewable energy and zero-emissions processes, and for consumers to transition to better insulated homes, sustainable transportation and more energy-efficient products. This would also create a more level playing field for producers of clean energy such as wind energy and solar power. As economies of scale are created for such production, the price of such energy will fall, and the shift to clean energy will accelerate.

The fee-and-dividend system I favor is a variation of the proposal favored by the nation’s leading climate scientist, Dr. James Hansen. Under this proposal, a fee is imposed on each fossil fuel at the point of sale, in dollars per ton of carbon dioxide in the fuel. The public does not directly pay any fee or tax, but the price of the goods they buy increases in proportion to how much fossil fuel is used in their production. Fuels such as gasoline or heating oil, along with electricity made from coal, oil or gas, are affected directly by the carbon fee, which is set to gradually increase over time. This gives the public time to make changes in transportation, housing, insulation and other consumer decisions in order to avoid the higher costs. Under the dividend part of the proposal, the public is also given the means to do so. Hansen proposes that the fee-and-dividend system be revenue neutral, such that 100 percent of the money collected from the fossil fuel companies is distributed uniformly to the public. Those who do better at reducing their carbon footprint will receive more in the dividend than they will pay in the added costs of the products they buy as a result of the fees.

I would modify Hansen’s proposal in several respects. First, instead of just imposing the fee on CO2 emissions, I favor imposing fees on all greenhouse gases, including methane and nitrous oxide, which, pound for pound, contribute much more to global warming than CO2. I would also add nuclear power, which, although it does not contribute to global warming, also imposes costs on society, such as the terrible human costs involved in mining and processing uranium, and the cost of storing nuclear waste for thousands of years, that are not adequately reflected in the price of nuclear energy. I would propose to impose a fee on nuclear power equivalent to the fees imposed on greenhouse gas sources of electrical power.  This would also ensure parity between Northern Illinois, where much of the population gets it power from nuclear sources, and Central and Southern Illinois, where more of the population gets its power from coal.

Second, because the State of Illinois is in dire financial straits, I would not make the fee-and-dividend system revenue neutral. However, the fee-and-dividend system would provide an opportunity to address some of the regressive impact of our current system of taxation and provide more of the burden on those most able to pay, instead of putting it on those least able to pay. Although precise figures are not available, we estimate that a fee on CO2 emissions amounting to $8.80 per metric ton (the equivalent of imposing a 10 cent fee on a gallon of gas), with proportionately higher fees imposed on sources of methane and nitrous oxide, would yield gross revenue of about $5.5 billion. I would propose remitting dividends to consumers in the amount of $3.5 billion, yielding a net gain of $2 billion. In order to counter the regressive impact of the current Illinois tax system, I propose that the lowest income Illinois taxpayers (as measured by their most recent annual filing) be paid a quarterly dividend that would actually be higher than the estimated impact of fees on the prices they pay for energy, that middle-income taxpayers receive a dividend about the same as the impact of the fees, and that higher-income Illinoisans receive dividends proportionately less than what they pay for higher energy costs.

The creation of a statewide public utility, and/or changes in state law allowing energy co-ops to compete with Ameren and Com Ed statewide, could also provide a means by which to mitigate any adverse pricing impact of the greenhouse gas/nuclear power fees.

References: (Study of proposed carbon tax in New Mexico: http://www.emnrd.state.nm.us/ecmd/Multimedia/documents/carbontax8_14.pdf); James Hansen, How to Solve the Climate Problem, The Nation, 13/30/2009, http://www.thenation.com/doc/20100111/hansen.

F. Raise additional revenue by ending the socially destructive “war on drugs” and specifically by legalizing and taxing the sale of marijuana.

The so-called “war on drugs” has been a colossal failure, imposing huge social and financial costs on our criminal justice system and society at large. It has resulted in the United States having the higher incarceration rates in the world and made “criminals” out of people who sought only to experience the pleasure of an altered state of consciousness. The criminalization of marijuana is especially irrational, when the hazards of marijuana consumption are compared those of alcohol, tobacco and any number of legal pharmaceutical drugs. Most sensible people know this to be true. A growing number of law enforcement officers agree that arresting and prosecuting people for cannabis possession and consumption is a waste of resources. Yet, somehow, conventional political thinking requires most legislators to ignore fact and common sense and pretend that voters won’t support a more enlightened view of marijuana and drug use.

Against this, I say that we can no longer afford to ignore fact and common sense. I support the full legalization of the production, sale and consumption of marijuana, and propose that it be taxed at rates comparable to current taxes on alcohol and tobacco. We should decriminalize other drugs, by degree, maintaining criminal penalties for truly dangerous substances such as methamphetamine. We should treat most drug abuse as a public health problem more than a criminal problem.

The overall case for taking such steps is a separate subject, to be treated at greater length in my platform on criminal justice issues. With respect to the economy, ending the war on drugs and legalizing marijuana will allow us both to raise additional revenue, channel funds to more productive areas of the economy than the prison-industrial complex and focus law enforcement resources on real crimes.

It is almost impossible to determine how much revenue could be realized by taxing the sale of marijuana in Illinois. Illinois obtained about $615.9 million in tobacco and cigarette taxes in FY 2008. Guesstimating that roughly1/3 that sum could be collected on marijuana taxes would yield a figure of about $200 million, although this would not be available until after legalization and startup of commercial production and sale.

References: http://www.mpp.org/assets/pdfs/downloadmaterials/TandRARGUMENTS092008.pdf

http://www.slate.com/id/2220221/pagenum/all/#p2

Total additional revenue to be realized by the Whitney plan for tax and budget reform:

Savings from targeted cuts of pork and reallocation of bad Capital Bill expenditures: $2 billion

SB 750: $7.352 billion (not counting added revenue for education)

Financial Transactions Tax: $4.5 billion

State Bank: Unknown; long-term potential is tremendous

Greenhouse gas fee and dividend: $2 billion

Legalization and taxation of marijuana: Not applicable during start-up (est. $0.2 billion afterwards)

Total: $15.852 billion

Less structural deficit of $12.3 billion = $3.552 billion net increase