The Week in Public Finance: Lobbying Congress on the 'Tax Perk,' Chronic Deficits and the Credit Threat in Illinois

A roundup of money (and other) news governments can use.
by | July 14, 2017
Illinois Gov. Bruce Rauner speaks during a news conference. (AP/G-Jun Yam)

Tax Deductions Aren’t Just for the Super-Rich

As the Trump administration promotes a tax reform agenda that would take away the state and local tax deduction, government organizations are pushing back hard against the notion that the tax perk is utilized only by the uber-wealthy. A new report this week shows that more than half of the tax filers who take the deduction earn less than $200,000 per year. In fact, the largest group of filers who deduct their state and local taxes from their federal taxable income earn between $100,000 and $200,000 per year.

“Contrary to popular opinion, the deduction of state and local taxes does not exclusively benefit the wealthy, even though that argument has been used countless times in attempts to modify or repeal the deduction,” says the report, which was prepared by the Government Finance Officers Association.

 

Source: Government Finance Officers Association

 

The report provides a map of populations taking the deduction by congressional district, finding it is most frequently claimed in the Northeast and in urban strongholds in the South and West. For example, in Illinois’ District 8, home to the Chicago suburbs, nearly half of taxpayers take the state and local tax deduction. Losing the perk would place an additional $1.2 billion in total tax burden on filers in that district.

The Takeaway: The data poke a hole in Trump's argument that his tax reform plan would be a boost for the middle class.Trump has proposed increasing the standard deduction, which could help offset some of the tax increase. But, according to the report, “even if it were to double or triple, a significant portion of taxpayers would still end up with tax increases.”

While the report lays out convincing data regarding taxpayers, it is still primarily a lobbying document urging Congress to “consider the impact any changes will have on the bottom lines of state and local governments.” Many public officials worry that taking away the perk would make it harder for states and localities to raise taxes in the future.

 

There’s a Reason They Call It ‘Chronic’ Deficits

If your state struggles with budget deficits, chances are it’s not a one-time thing. New research from the Pew Charitable Trusts analyzes state spending and revenue performance over a 14-year period and finds that 11 states spent more than they earned in the aggregate.

Of those 11, Illinois and New Jersey were the only two that had budget deficits every year between 2002 and 2015. Additionally, the two had the largest aggregate spending gaps with revenues falling an average of more than 5 percent short of expenses.

Meanwhile, California, Connecticut, Hawaii, Kentucky, Maryland, Massachusetts, Michigan and New York had deficits more than half the time, and Pennsylvania ran a deficit six out of the 14 years. Aggregate spending gaps were between 3.8 percent in Hawaii and less than a percent in Michigan and Pennsylvania.

Nationally, state revenues over the 14-year period averaged 102 percent of expenses. Resource-rich states such as Alaska, North Dakota and Wyoming earned an average of more than 120 percent of expenses.

The Takeaway: In some ways, the list of states that averaged a deficit during that period is a who’s-who of public finance woes. On the other hand, it doesn't tell the whole story. A look at California’s trend, for example, finds that the state turned a corner in 2013 after experiencing budget deficits every year prior. In 2013, the state instituted an income tax hike and later established new rainy day savings policies that helped stabilize its budget.

Conversely, Louisiana, which isn't one of the 11 states and shows a budget balance close to the national average in the 14-year period, has been sliding downhill ever since 2010 when former Gov. Bobby Jindal’s income tax cuts took hold. The state has dealt with budget deficits every year since.

 

Illinois Not Out of the Woods Yet

Illinois’ first budget in two years got it out of the doghouse with one ratings agency. But another one is still considering downgrading the state into junk status.

S&P Ratings this week said the enactment of a state budget means a downgrade “within the next year has substantially diminished.” The budget, which institutes an income tax hike and includes some spending reductions, brings the state closer to structural alignment and reduces near-term uncertainty about whether the state will meet its obligations.

Still, the budget doesn’t address Illinois’ $15 billion in unpaid bills nor does it do anything to reduce the state’s more than $100 billion unfunded pension liability. For those reasons, Moody’s Investors Service is still considering whether a downgrade to junk status is warranted.

The Takeaway: Without a budget to fight over, political leaders in Illinois are turning their attention to the downgrade threat. Gov. Bruce Rauner has essentially cast the threat as an empty one, and told lawmakers last week, “don’t listen to Wall Street.”

Meanwhile, State Treasurer Michael Frerichs is urging the governor to follow a six-point plan to avoid a downgrade. The plan includes issuing $6 billion in debt to start paying off unpaid bills. “Should [Rauner] not take these necessary steps,” Frerichs said, “he is inviting the credit-rating agencies to plunge Illinois into junk bond status, the results of which will lead to higher property taxes.”

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