The state of the State
Children and tax policy
By MICHAEL D. KLEMENS
State tax policy in Illinois has had a single focus: to generate money. State human service policy has been secondary: to react to demands for service, when the money generated by the tax policy allows. In short there has been no public policy.
Instead politics has prevailed. The key political question is who gets what the tax policy (or non-tax policy) generates. Advocates for human services, education, transportation, economic development, public safety, natural resources and recreation compete for the available resources. Often, as educators did for three years, the groups venture into tax policy far enough to champion tax increases to pay for their wish lists.
This year a human service group, Voices for Illinois Children, has moved beyond asking for a larger piece of the pie to seeking fundamental tax policy changes in the interest of sound social policy. The three-year-old Chicago-based advocacy group wants a state income tax credit for the working poor. For the fall "veto" session the group placed the state income tax credit ahead of priorities like reduction of infant mortality rates that are among the nation's highest and higher payments under the Aid to Families with Dependent Children program.
Malcolm Bush, vice president for policy with Voices for Illinois Children, explains the venture into tax policy succinctly: "We're concerned with families who aren't making it. Many families who are not making it are not making it because they're poor. It seems silly to give family services when what they need is income."
From a public policy standpoint there is plenty wrong with the state's tax structure. Illinois state and local governments are highly reliant on property and sales taxes, both considered regressive taxes because they do not reflect ability to pay. And the constitutionally mandated flat-rate income tax, in contrast to graduated tax rates in other states, hits low-and high-income taxpayers at the same rate. In the 20 years since the Illinois income tax was enacted the tax has remained unchanged, except for the temporary increases of 1983 and 1989, and inflation has undercut what progressivity the original tax enjoyed.
The sole progressive aspect of Illinois' flat-rate income tax is the personal exemption of $1,000. Since its enactment, inflation has eroded the value of the exemption by more than 60 percent. To restore it to its 1969 level the personal exemption would have to be boosted to $2,500, which at the current temporary income tax rate of 3 percent would take nearly $400 million out of state tax revenues. What the state loses in revenue, both high-income and low-income individuals would gain. Raising the personal exemption $1,500 would save everyone $45 per year.
Also contributing to the growing burden on poor families were the 1989 tax increases. Increasing the per pack cigarette tax from 20 to 30 cents will hurt low-income persons more than high. So will the 6-cent per gallon gasoline tax hike. And the flat rate income tax increase hits the poor harder than the rich. The 1989 package's sole tax relief component doubled the income tax deduction that homeowners can take on their property taxes, a break likely to be of little help to the working poor.
Voices for Illinois Children uses a 1987 study by Citizens for Tax Justice that says that the poorest 20 percent of taxpayers in Illinois pay 11 percent of their income in taxes. At the same time the richest 1 percent pay about 5 percent of their income in taxes. Voices for Illinois Children estimates that 500,000 children in Illinois live
November 1989 | Illinois Issues | 10
in families below the poverty level, and the group notes that an increasing number of the poor are working poor. Voices cites an analysis done for the National Conference of State Legislatures which said the number of people who worked but whose families remained below the poverty level increased 60 percent between 1978 and 1984.
Voices for Illinois Children's venture into tax policy as social policy calls for adoption of an earned income credit derived from the existing federal credit. The federal credit was established in 1975. It allows families with children to take a credit (a reduction in their taxes) if their earnings were less than $19,000. The money must be wages, and the amount of the credit depends upon income. The maximum is $910 in 1989.
Bush's group would have the state piggyback onto the federal credit by allowing 25 percent of the federal credit for Illinois 's working poor. At one-quarter of the federal credit, the maximum state credit would be $227.50. Voices estimates that 403,000 taxpayers could claim an Illinois credit, averaging $138 per taxpayer for a total cost of $56 million.
If the credit exceeded the taxes owed by a household, the money would be returned to the taxpayer as a sort of negative income tax. Bush argues that the $138 per household is not a large amount of money but could pay utility bills or outfit children for school. And it is money that government should not be taking from the poorest of its citizens, Bush contends.
The children's advocacy group argues that its earned income credit meets the only real tax policy test in Illinois, the stricture that the state personal income tax form (the IL1040) be kept simple. It would take two lines to put a state earned income credit into place, one to transfer the figure from the federal form and a second to take 25 percent of it.
Voices for Illinois Children is proposing use of tax policy as social policy. The statistics demonstrate that the state's working poor are carrying a heavier tax burden. But the numbers also show that the income tax is fulfilling its current policy to generate revenue. Income taxes are the only state revenue source that has exceeded inflation over the last decade. Lawmakers' reluctance to tamper with the state's most dependable revenue source complicates Voices for Illinois Children's task.
November 1989 | Illinois Issues | 11