Ends and Means: Should officials cash in state assets?

In his State of the State/budget address last month, Gov. Rod Blagojevich quoted Dr. Martin Luther King Jr. and cited Hercules' struggle to kill the many-headed Hydra.

But the $60 billion spending plan he presented also seemed to embody the advice of the famed Chicago architect, for it was truly super-sized. Blagojevich called for:

• The largest tax increase in state history, a new tax on every nickel coming in the door that would cost Illinois business an estimated $6 billion a year.

• The largest bond sale in state history, a $16 billion borrowing plan that would raise the state's general obligation debt load by some 80 percent.

• The largest disposal of assets in state history, a $10-billion, long-term lease of the state lottery, far eclipsing the governor's proposed $216 million mortgage of the Thompson Center in 2004.

• The largest-ever increase in spending for elementary and secondary education, $1.5 billion more for the fiscal year starting July 1.

• The largest-ever expansion of state-subsidized health care, intended to provide coverage for most of the state's 1.4 million uninsured residents.

• The largest-ever infusion of cash into the state's underfunded public employee pensions, a $26 billion windfall that overnight would bring the five systems' assets to roughly 83 percent of benefits due current and former workers.

Indeed, about the only moderate aspect of his address to a joint legislative session was its length, clocking in at just a few minutes past half an hour. But the rhetoric was larger-than-life, especially when the governor argued for his "Tax Fairness Plan," as he dubbed the proposed gross receipts tax.

The new levy would replace what the governor termed the "loophole-ridden" corporate income tax that allows big corporations to avoid paying "their fair share" of government costs.

From 1997 to 2004, he told lawmakers, almost half of the corporations with annual Illinois sales of $50 million or more paid no corporate income taxes. In 2004, 37 Fortune 500 companies paid no state income tax, despite averaging $1.2 billion in sales here.

"This is grossly unfair," he said.

Even as he followed Burnham's advice to think big, the governor also managed to "stir the blood" of almost everyone with a stake in the battle, though perhaps not always in the way the architect envisioned.

Education groups and health care advocates enthusiastically applauded the governor's plans to pour more money into their causes, of course.

But the state's business community condemned the new tax as a serious blow that would discourage investment in the state and hurt job growth. Moreover, business leaders warned, much of the higher tax burden would be passed on to consumers in the form of higher prices for most of the goods and services they buy.

Administration aides downplayed such concerns, predicting that companies would absorb most of the added cost because the rate of the new tax would be so low — only 50 cents on every $100 taken in by a goods-producing business, like a manufacturer, and $1.80 per $100 for a service company, like an accounting firm.

In addition, they noted, the plan would exempt entirely businesses with Illinois sales of less than $1 million and would exclude receipts from goods sold outside Illinois, from retail food and drug sales, and from Medicaid payments to health care providers, so that three-quarters of Illinois companies would not be covered.

Whether the business community's fears are well-founded, or administration assurances are on target, probably can't be known until the tax is in place, and a lot will depend on the actual wording of the law. Not even a draft version was available at the time of the governor's address.

Still, some initial observations seem warranted. Consider, for example, the governor's complaints about the "loophole-ridden" corporate income tax, with its overtones of shady doings.

Under current law, corporations are taxed only on their profits — their revenues minus their business expenses — from their activities in Illinois. They pay billions of dollars in property taxes, sales taxes, excise taxes, fees and other government-imposed costs, which reduce their profits and thus their income tax liability. They also can reduce their liability through various deductions and credits, if they are eligible. They may also deduct net operating losses over several years.

Such tax breaks have been enacted over the years to encourage businesses to behave in certain ways, such as hiring people who are leaving welfare, or expanding operations on the state's borders. In fact, Blagojevich last year signed into law an expanded movie and TV production credit, intended to boost the state's film industry. Corporate tax breaks cost the state an estimated $200 million in fiscal 2005, according to the most recent report from the comptroller, a sum roughly equal to about 20 percent of the amount corporations paid.

Would a gross receipts tax preclude "loopholes"? Obviously not. The governor's plan, for example, includes exemptions that would remove about half of the state's overall economy from its reach. And the same shrewd accountants and clever lawyers who figured out how to game the income tax will do the same with the gross receipts tax.

Also certain is that consumers will wind up paying a good chunk of the new tax, although exactly how much is impossible to say. Even if only half of the $6 billion tax is passed on, however, the extra $3 billion bill for consumers is close to a third of what Illinoisans already pay in income taxes — but, unlike state income taxes, would not be a federal deduction.

Given such uncertainties, one would be well-advised to update Burnham's wisdom — make no little plans, but be sure to read the fine print on the big ones. 

Charles N. Wheeler III is director of the Public Affairs Reporting program at the University of Illinois at Springfield.

Illinois Issues, April 2007