Thursday, May 17, 2007

There Are Still Long Term Revenue Problems to Fix

The Problems:

1) Because the economy has changed and the Illinois tax structure has not, we run into continual budget crises. Our taxes tend to fall on the manufacturing and retail goods sectors that are declining relative to the whole economy. Tax rates on those sectors are too high and revenue does not keep pace with budget requirements, while the expanding service, financial and information sectors largely escape the existing taxes.

2) The corporate income tax is no longer a tax that can be effectively collected by state revenue departments. Multi-national corporations have become so large and their financial inter-relationships so complicated that it is virtually impossible to monitor the allocation of income to individual states.

David Brunori writes in his 2005 “State Tax Policy”, published by the Urban Institute:

The percentage of total state tax revenue collected from levies on corporate income has declined steadily for more than two decades. … More important, in every year since 1959, the corporate tax base has failed to keep pace with company profits, either worldwide or domestic. In other words, in relative terms, state governments are collecting less in corporate income taxes while corporations are earning more.

Robert Tannenwald, an economist with the Federal Reserve Bank of Boston, writes:

“Multi-jurisdictional entities are so thoroughly integrated that formulas designed to allocate their income geographically are in large part arbitrary and therefore controversial.”

3) The result over time has been a shift in tax burden away from business onto individuals as the response to these changes by state policy makers has been to increase individual income taxes.

Tannenwald’s study showed that between 1986 and 2000 the ratio of state corporation income taxes collected to corporate income decreased by almost 50 percent, while the ratio of state and local personal taxes and charges to personal income increased by 25 percent.

The Solutions:

1) The Governor suggested a gross receipts tax to address all three of the above long term structural problems, make the tax system fairer, and put the state on a sound fiscal basis moving into the future.

2) The only other alternative that has been suggested, SB/HB 750, does not address problems 1 and 2, and makes problem 3 worse.


Annette Nellen said...

Perhaps the governor is moving too fast and now has a "no" vote from the legislators. Major tax reform is not easy and it is challenged by the reality that few truly understand an existing tax system and policy implications of tax systems. What alternatives can the governor bring up to show that the gross receipts tax is the better option?

Also, why not bring in data from neighbor Ohio that actually enacted its commercial activity tax (CAT) in 2005. What has been the reaction of businesses and customers? What was the affect on government revenues? What problems arose?

It seems that more work is needed, but that reform is also needed to be sure the tax system is the one that would best serve Illinois and its citizens in today's information age economy (the existing tax system written for the industrial age will have some flaws today).

I've also included a brief discussion on this proposal (and other state reforms) at

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