Crash Course in Illinois Taxes with David Merriman, UIC Economic Policy Professor
Illinois has so many different ways to tax its citizens, it can be hard to keep up. Join us as we interview David Merriman, an economic policy professor at the University of Illinois-Chicago about the past, present and future of Illinois tax structure.
Q & A with David Merriman
Andy Shaw: I'm joined today by David Merriman, professor at the College of Urban Planning and Public Affairs at the University of Illinois-Chicago. David Merriman's major area of study is state-local public finance. He directs the Fiscal Futures Project which maintains comprehensive and consistently defined measures of the Illinois state budget. He's also published extensively about the effect of tax increment finance policy on local government growth and on Illinois’ fiscal imbalance and budgetary concerns. Welcome, David. Thanks for joining us on Ready Set Gov.
David Merriman: Thanks, nice to be here.
Andy: Let's start with a simple overview, taxes in Illinois. I think the two things that are safe to say are that Illinois voters hate taxes and Texas. I'm not sure which they hate more but let me ask you, do we have a right to hate our tax system overall or are we pretty much like the other 50 states?
David: Well, I think our tax system is flawed in many ways. We're probably not the worst in the country. What we do have is an unusual reliance on property taxes and flat income tax which, for high-income states, is a little bit unusual and those two things make us somewhat distinctive.
Andy: Let me ask you, are we a high-tax state, a low-tax state, or an average tax state when you put together property taxes, income taxes, sales taxes, gas taxes, the whole gamut?
David: Well, of course, there's a lot of ways to look at that. The state taxes, leaving aside property taxes, are relatively low. Property taxes are relatively high when you put them together. As a share of personal income, we're in the top group, but we're not at the top.
Andy: Is our tax system fair?
David: I wouldn't regard it as fair at least to the extent that you think about progressivity. Different people have different conceptions of what's fair. We don't do a lot in Illinois to reduce the burden on low-income people or to shift some of the burden towards high-income people. We're somewhat of an outlier on that.
Andy: I've been watching Illinois government and politics probably as long as you have and what strikes me is that the state has changed dramatically in the past 25 or 30 years from a manufacturing hub to more of a service economy. The economics of Illinois have changed dramatically and yet the tax policy stays about the same.
David: That's true.
Andy: And I wonder what the impact is, if that increases the unfairness or the imbalance?
David: One of the big things is we have much more of a service economy and we don't tax the service sector very well, particularly through the sales tax, and that's a problem a lot of states are having. There's also the problem with internet sales that we don't do a good job of taxing.
Andy: Does our overall tax system help our state government and economy or hurt it? In other words, is it a system that benefits growth and fair government or hinders it?
David: I think that's a difficult question. I guess what I would say is the tax system is much less of a concern than the political dysfunction. That's really I think what's holding our state back economically. The tax system, of course, could be better but it's not the fundamental problem hampering the economy of the state in my view.
Andy: Okay, so let's go to individual taxes. Let's talk about the property tax. Depending on who you listen to on a given day, Governor Rauner says we have the highest property taxes in America and maybe we do, maybe we're close to the top, but how bad is it from a homeowner or property owner standpoint?
David: I think you really have to look at it regionally. First of all, the property tax on residences in the city of Chicago is actually quite low, because we have a classified system where we assess business property at a higher level and we have a lot of business property in the city of Chicago.
In the suburbs, particularly some suburbs like Oak Park where they don't have a lot of business property, the burden on homeowners is quite high and particularly because they rely a lot on schools. Downstate, you have the issue of agricultural property which is taxed at a lower level
and so homeowners there may suffer because they aren't helped out by agricultural property.
Andy: So when you put it all together, do we have the highest property taxes or is that just according to one measure?
David: I think in some areas of the state, we're near the top – I don't know if we're at the absolute top – but in other areas of the state, the taxes are quite low. So it really depends for residences very much on how much they spend on schools and what's the mix of residential and business properties.
Andy: To what extent is the size of property taxes in Illinois dependent on public education’s reliance on that particular revenue source?
David: That's the key issue. About more than half -- two-thirds or so -- of property taxes are going to pay for schools, and there's not a lot of other sources of funding. We've just changed the school finance system in the state with this Legislature and to what extent that will change matters is still a little unclear to me.
Andy: Talking about being No. 1 in the areas that we'd rather not be, you could argue that we're close to the top in the shortfall of state funding of education. Maybe this new education funding plan will begin to correct that, but we're among the worst in terms of funding schools, aren't we?
David: On the state level, that's correct. We've made the decision to make it a local responsibility largely and the problem with that is, of course, some districts have much higher need and much lower resources than other districts, so that's a real problem.
Andy: There's a lot of talk about a property tax freeze, one of the cardinal points on the governor’s agenda, and I'm just wondering if we were to wave a magic wand and freeze all property taxes tomorrow, what would the impact be?
David: Well, it would be different in different districts. Again, in some districts, it would be very harsh. Particularly, if you have districts where you have population growing or you have need growing for some particular reason. In general, I, and most economists, like the property tax because it's very visible, but that also makes it painful to constituents. But I think the right response to that is, let's talk about what government services we want and how we're gonna pay for them rather than try and have artificial means of a shifting the burden.
Andy: The governor's argument would be freeze property taxes, and force local government to stop wasting so much money, make them belt tighten because they won't have as much revenue, there's lots of fat, lots of bureaucratic bloat. Could we have a property tax freeze and not lose much in the way of services by just being more efficient and more economical?
David: I just don't think there's much evidence that putting a freeze on taxes reduces waste. I guess one way to do it would be to try and do some experiments and see whether it really works, but I'm not sure what logic gets you to think that you have less waste if you had a freeze.
Andy: To what extent do you think that the shortcomings in the assessment system in Cook – and maybe in 101 other counties – contributes to our tax burden or tax inequality?
David: Well, here I'm very aware of the articles that have been written. You know historically, the Cook County assessment system has been professional and on par with other advanced places, in particular, the residential assessment process which I'm quite familiar with. I don't know what's happened in recent years.
The nonresidential assessment is much more difficult and may not have been as high quality. One way we're unusual in Cook County though is that the appeals process is just utilized much more and it's vulnerable to abuse. I think it would be very appropriate to take a real hard look at what's going on with that assessment system.
Andy: But let's get back to taxes and move to the income tax. Five or six years ago, we cut the income tax. In this past year, we went back to the old income tax, give or take a couple of dollars, and yet it's still the same, it's flat. And it's “x” amount for individuals and a little bit higher, corporations pay a little bit more. So, are we typical or are we atypical in terms of how states handle their income tax?
David: What's unusual is with the flat tax that we have a single rate, we have a very low personal exemption and particularly for sort of liberal states, Democratic states, the kind of income tax system that we have is kind of unusual. You would typically expect some kind of progressive system or at least an attempt to exempt incomes to help out the bottom end of the income distribution and we really don't do that.
Andy: Right. Some states have no income tax and of course, those are the places that a lot of Illinois residents are fleeing to when they want to get out of either the cold weather or the cold politics, and then states have graduated tax as they call it. The word progressive has a connotation that may not be fair because one man's progressivity is another's regressivity.
Let me ask you, would it be fairer to have some kind of a graduated tax or a tax on millionaires or multimillionaires? We talk about it every year and yet nothing changes.
David: I don't know that I'm really qualified to comment on whether it would be fair. I think that's largely in the eye of the beholder. I can say that recent economic studies have shown there's not a huge economic downside to relatively high tax rates on very high-income people. We've seen that in New Jersey and in California. And the evidence seems to be fairly strong that it's possible to do that without losing a ton of residents.
Andy: One thing we don't do in Illinois is tax retirement income and many other states do. Depending on whose analysis you take, whether it’s the Civic Federation or other groups, you could conceivably capture a billion or a couple billion dollars with a tax on retirement income even if you have a means test and exempted the first seventy-five or a hundred thousand dollars. Should we be looking more seriously at this? This is a third-rail issue because seniors vote and they would be furious. What do you think?
David: Yeah, I think we're very much an outlier. There's only, I think, three states that exempt as much retirement income as we do, very unusual. And there's not much equity argument or efficiency argument for doing that. We're exempting retirement income whether the person is wealthy or poor. So it's hard to see the public policy rationale for exempting retirement income.
Andy: Cook County has the highest sales tax in the country, 10+ percent. It went down under Preckwinkle and back up under Preckwinkle. And I'm just wondering, why is our sales tax so high? And is this regressive or is this fair?
David: Well, the sales tax is generally regarded as somewhat regressive, because poor people spend more of their -- larger share -- of their income on goods that are taxed than wealthy people do. Why is our tax so high? I think what we're talking about in Cook County is a lot of concentrated poverty, a lot of social services. It's a way to funding government and we're reluctant to use other means. We've been very reluctant to use the property tax at least within the city of Chicago.
Andy: Should we be charging for professional services? Should we be charging for consumption? Much of the world has the VAT, the value-added tax, which basically says, “You don't want to pay a lot of tax? Don't buy a lot of stuff.”
David: So professional services tax would really be in something of an expansion of the general sales tax and adding more services in makes a lot of sense because there's not a real good rationale for treating service consumption differently than goods consumption.
Should we be adding a value-added tax? Other states, a few other states, Michigan tried it, didn't work out very well. The truth is the sales tax can work as well as the value-added tax in most cases, so I don't see it as being something that the state necessarily should go to. We could raise the gas tax, because the revenue from the gas tax has gone down as cars get better mileage. I don't think it's so much a matter of looking at new taxes as a matter of deciding what we want to spend money on and being transparent about that and picking the right mix of taxes and services.
Andy: The short-lived sweetened beverage tax in Cook County was repealed not long ago largely because of the political blowback. Was that bad to begin with or just poorly executed?
David: It seems like it was poorly executed. I don't think the concept of it was necessarily that flawed. The idea that we're gonna tax these very high-calorie beverages to reduce obesity, I think it's an idea that makes a lot of sense to a lot of people. It was put in Cook County to fill a budget gap. It was implemented badly in a number of different ways and that was very problematic and this became politically unpopular.
Andy: What do you think of taxes that are designed to create social good or social agendas? The City of Chicago bag tax sold as an environmental tax and, of course, it was partly a revenue tax, the beverage tax sold as a dietary tax, was really a revenue tax. My problem I guess is, a lot of this stuff is disingenuous. I mean call a tax a tax. It's more money to get something and you could argue whether the government ought to be telling us what we can and can't do.
David: Well, I've done a lot of work actually on tobacco taxes, and tobacco taxes have been incredibly successful in terms of getting people to cut down on smoking, maybe just the one thing. I think public policies that encourage people to behave better in lots of different ways are appropriate. And the idea that we, as a society, collectively make some decisions about the environment or about public health makes sense to me. I do think you're right to be cautious that sometimes it's easy to aim a tax at a kind of minority or despised group. And it's the responsibility of everyone to pay for the government services we have.
Andy: So let's wind it up with a couple of general questions. If the State of Illinois were to engage in real tax reform, revisit all the options, and look at what's on the table, what should be off the table, where would you advise our leaders to look for a state or two that seems to be getting it right in its mix and its fairness?
David: I think it would be really good to give a look at the tax system as a whole, and maybe to do a tax study commission that look at each of the taxes. We shouldn't really be looking at the taxes in isolation. One state's tax system that I'm particularly fond of is Minnesota. Minnesota has a progressive income tax. They have credits built into the income tax to help low-income people in appropriate situations. They help out renters as well as homeowners. And I think it would be appropriate to do that. I also think Minnesota has a very enlightened attitude about evidence with respect to taxes. Every two years, they do a study of the tax system and look at who pays what. And we should also talk about business taxes. We haven't had as much chance to talk about them, but it's very important to look at those taxes as well.
Andy: So let's talk a little bit about business taxes. Is it fair in Illinois? Do we need to restructure that? We've talked about tax credits and the fact the businesses pay more than individuals. What tweaks do we need there to make that a better system?
David: First of all, we need to think seriously in Cook County about the property tax classification system. Property tax is actually the biggest tax the businesses pay. What's the rationale for that and do we really want that? Secondly, I think on the business income tax situation, we have a corporate income tax that taxes business if they're incorporated, but doesn't tax partnerships or other kinds of businesses. And that doesn't seem a very sensible way of going about it, particularly as less and less businesses are incorporated. So I think we need to think about a broader tax system that taxes the whole array of businesses and their income.
Andy: Yet, the critics look and they say Amazon is one of the richest companies in the world. Its owner is among the richest in the world. The last thing that they need is a lot of incentives. They should come here and basically spread the wealth. Yet every state offers them and it's a competition, if you don't do it, you're out. I'm just wondering if that itself is unhealthy.
David: Well, I think Amazon played it very smart in that they set up this very unusual kind of competition. In fact, from what we know about the package of incentives that was offered by the state of Illinois, it was actually kind of a modest package and that's, I think, because we are a very good candidate. The city of Chicago in particular fits the bill in many, many ways for Amazon. And I think the important thing to remember is we really still have a strong economy. What we need is government to work in a predictable and sensible way.
Andy: If you were Governor and Speaker and Senate President for a day and you had the capacity to give us the tax system that would be fair to the citizens, provide the necessary revenue and encourage business growth, what would you change?
David: I think I would make the tax system more progressive than it currently is, helping out people at the lower end of the income scale and more taxation on people at the high end. I would try and rationalize business taxation. In a number of ways, there's no real reason to treat corporations separately from non-incorporated firms. Those are the two big things.
I would say the most important thing is to have a system that was sustainable for the long term; that provided us enough revenue to pay our bills in a realistic way, so that we can move forward and businesses and individuals could have confidence that we would be fiscally sustainable for a long period.
Andy: Thank you for ending on a no-brainer, something I can understand very well. David Merriman, thank you for joining us. This has been Ready Set Gov, the BGA’s podcast.