Tax Reform: Going well beyond the school funding debate

By Mike Kroll

Ralph Martire gave an impressive presentation promoting school funding reform this past Thursday over lunch in the crowded Kensington Ballroom. He is the executive director of a non-profit, non-partisan think tank called The Center for Tax and Budget Accountability and he spoke here at the invitation of Galesburg school superintendent Neil Sappington. Martire's point to to muster support for an ambitious tax reform bill now before the Illinois House, HB750. Martire tout this bill as the best opportunity to adopt "a real solution to school funding problems by guaranteeing property tax relief, shifting responsibility for education funding to the state, generating the necessary additional revenue without penalizing existing well-financed school districts and fixing the Illinois tax system to insure that it provides adequate, reliable and sustainable revenue for the foreseeable future." To make the goals of this bill just a bit more ambitions its sponsors also promise that it will make the Illinois tax system more fair without reducing the state's business competitiveness.

Martire stood before an audience composed mostly of business leaders, education officials and leaders of area communities that would be impacted by the changes proposed in this bill. It is a statement of high regard that Martire was able to speak for an hour on the subject of taxes, presenting more more figures and charts than Ross Perot to an audience of diverse and competing interests and still be warmly received even as he proposed to increase income and sales taxes. The carrot was that HB750 not only promises to better fund schools, it also delivers $2.5 billion in property tax relieve at the same time.

HB750 will increase Illinois' current personal income tax rate from three percent to five percent raising an estimated $5.0 billion. Martire pointed out that even with this increase Illinois' personal income tax rate will still the be seventh lowest in the country, tied with Mississippi. It expands the present sales tax to include most non-medical services for the first time generating an estimated $1.0 billion additional revenue but notably excluding professional services from lawyers and accountants. The bill will also increase corporate income tax to eight percent yielding an estimated $491 million and begin subjecting retirement income above an adjusted gross of $75,000 to personal income tax reaping another $359.0 million. And finally, the bill would eliminate approximately $250 million of corporate tax loopholes. These new revenues should total about $7.1 billion by Martire's math.

Of course that $7.1 billion in new revenue must be reduced by the bills promised $4.2 billion in property tax relief thereby yielding a net tax gain of $3.8 billion in annual Illinois revenue. Not all of this money goes directly to new school funding either. HB750 also addresses what economists term as a "structural deficit." This is a situation where planned or budgeted spending exceeds the ability of the revenue base to support it on an ongoing basis. An excellent example of this principle has been Governor Rod Blagojevich's balancing of this year's Illinois state budget based on one-time revenues offsetting continuing operational costs. A substantial amount of this $3.8 billion goes to addressing Illinois' structural deficit.

There is little question that Illinois schools are in a dire financial state right now. Today slightly better that two-thirds of the expense of elementary and secondary education is funded by local property taxes. State funding of education ranks 48th nationally and the disparities between the relative wealth of individual communities as reflected in their property taxes has resulted in huge differences in the money available to local schools. When the Illinois lottery was created it was ballyhooed as a huge new school funding source but unfortunately the geniuses in Springfield simply used these addition funds as a means to offset reducing the amount of other state funds already earmarked for education-- there was no net gain in education revenue.

Part of the promise of HB750 is to create a minimum level of school funding per student that matches the national average. Called the "foundation level" of funding, Illinois currently provides less than $5,000 while the national average is $6,029 this year. That means fully half of the states guarantee a foundation level exceeding $6,029 while half (including Illinois) fall below that mark. As the Illinois economy has soured so too have the revenues from local property taxes and eight out of ten Illinois school districts are deficit spending this year. Locally schools have cut staff as well as programs and raised fees. Course offerings have been reduced while class sizes increased. Necessary books and classroom supplies are going un-purchased and more and more area school districts are losing their financial footing.


HB750's Estimated Impact on State Funding of Selected Galesburg Area School Districts

School District

Estimated Increased School Revenue

Estimated Total Property Tax Abatement








































Assessed purely on the basis of school funding reform few proposals come close to addressing the complex problems that HB750 tackles head-on. The table shows some pretty impressive funding benefits for selected area school districts. While very school district in Illinois benefits the level of benefit can vary considerably. Martire says that when they crafted HB750 a major consideration was to help increase funding of those school districts most adversely affected by the current system without reducing the funding of more fortunate school districts. Obviously, many of the wealthiest school districts (typically found in suburban Chicago) would certainly object to any change that cost them state money but it remains unclear whether they will accept delivering the vast bulk of the new education funds to less fortunate districts.

Locally, Galesburg comes out pretty well according to Martire's numbers but so do most Illinois school districts outside of suburban Chicago. Perhaps that is why it has gathered support from across the education spectrum. That was certainly why Sappington brought Martire to speak in Galesburg. Certainly you have noticed that one area school district is definitely not a big winner here. The Williamsfield schools get comparatively little benefit from HB750's formula. It is also unclear what effect the many pending school district consolidations may have on the distribution of additional education funds reaped by HB750. Another issue is the uncertain net effect this will have on local property taxes. Under Illinois' present economic climate it is not just schools that are hurting. If the property tax relief delivered by HB750 results in other local taxing bodies seeking increased property tax revenue, however necessary or justified, a significant selling point of this measure will be lost.

But support for this bill is broader than just the education community. Couched in the promise of better school funding for a state whose history of school funding is embarrassing, HB750 really addresses the inherent unfairness and increasingly inadequate nature of Illinois' tax system. Martire makes a powerful case that the current state budget crisis is to a large extent the result of a state tax system that places the greatest burden on those least able to pay while shielding the wealthy and politically powerful.

In a study published in January 2003 by The Institute on Taxation & Economic Policy Illinois tax revenues are shown to disproportionately depend upon regressive sales and excise taxes. "While the primary concern of lawmakers likely to be tax adequacy (ensuring that sufficient revenue is available to fund important services), it is equally important to assess the fairness of state tax systems ...Our primary finding is that most state and local tax systems take a much greater share of income from the middle- ans low income families than from the wealthy. That is, most state tax systems are regressive. ...A second key finding of the study is that overall, changes in state and local taxes over the past decade have made state tax systems even more regressive."

Of the ten most regressive tax states Illinois ranks 6th. Illinois is in this position due to a number of choices made by our legislature. First, we have a low flat income tax and second, we rely heavily on sales or other consumption taxes. While at first glance a flat income tax rate seems fair it fails to take into consideration a persons ability to pay taxes beyond the everyday cost of living. The wealthier one is the smaller a portion of income is required to meed the basic everyday needs of existence. That is the basis for the progressive Federal income tax system.

Along similar lines, poor and middle class tax payers spend a much higher proportion of their income on necessities that are subject to sales tax than the wealthy. "Sales and excise taxes are very regressive. On average, poor families pay almost eight times as high a share of their income in these consumption taxes as do the best-off families, and middle-income families pay more than four times the rate of the wealthy." Even property taxes disproportionately affect middle-income versus the wealth as the wealthiest among us pay the smallest portion of their annual income on such taxes.

Part of the logic behind HB750 is to restore a broader, fairer, more stable system of taxation to Illinois. The adverse impacts of our present system on school funding is just one of many symptoms of the bigger problem. Recognition of this goal has helped attract support from groups and interests beyond education to HB750 but this may also be the legislation's biggest liability. The special interest groups representing those who most benefit from Illinois current tax system are unlikely to just roll over and play dead. They will fight vigorously against the proposed changes as increased taxes and politicians like our Governor who campaigned on pledges of no new taxes are equally unlikely to jump on board HB750.