Federal aid urgently needed to avoid state budget catastrophes

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CHICAGO—Looming behind the 17 million jobless tsunami hitting the country is another disaster: over $180 billion in accumulated budget deficits set to devastate state governments, according to a new study by the Pew Center for the States.

The Economic Policy Institute (EPI) says in addition, city and town governments are expected to have deficits of $100 billion over the next two years.

 

This threatens a calamity like the one playing out in California. Many states face horrendous cuts to education, health care, mass transit and other human service programs, skyrocketing taxes and fees that will severely slow any economic recovery.

Robert Borosage, co-director of the Campaign for America's Future notes, "And even if we avoid another downturn, the job picture will get worse. Crippling state deficits-over $260 billion over two years-will force layoffs that cost an estimated 900,000 jobs next year if nothing is done."

Illinois is listed among the top ten states in "fiscal peril" according to the Pew report. These states are confronted with the worst combination of foreclosure rates, unemployment, state revenue losses, and budget gaps. Illinois is struggling with a staggering $13.8 billion budget gap that seems to grow by the day.

In addition the state pension system is in debt by $35 billion because the state doesn't have the money. This has nothing to do with "lavish" public employee pensions, as Republicans, right wing and big business think tanks assert. Public employee pensions are in line with and in some cases lower than the private sector.

The Illinois state budget crisis is deepening because of growing joblessness, but has been compounded by decades of under funding of education, health care and human services. A regressive, flat, state income tax structure imposed by the state constitution, has forced the state to rely heavily on property taxes.

Earlier this year the legislature and Gov. Pat Quinn cut $2 billion in preschool, after-school and mental health and other human service programs, laid-off 2,500 state workers and left thousands of other positions unfilled. This has wreaked havoc across the state, with scores of programs curtailed and shuttered.

Illinois State Board of Education Chair Jesse Ruiz warned if the state doesn't generate new revenue for schools next year, "we fall off the cliff."

The only way out of this crisis is through public jobs creation, a massive infusion of federal money to fund education and health care and a progressive restructuring of the state tax system.

Governor Pat Quinn proposed a progressive income tax, which died in the Democratic controlled state legislature this past spring. Under intense public pressure, the state senate passed HB 174 that would raise revenues by altering the tax code. Powerful interests and a fear of raising taxes going into an election year blocked the bill from coming up the House.

The Responsible Budget Coalition, made up of some public sector unions and a broad range of human service organizations that represent and serve millions of residents, has sounded the alarm about the urgency of the situation and the need for massive new revenues.

The RBC supports passage of HB 174 that raises income taxes from 3% to 5% and corporate taxes from 4.8% to 5%. The bill increases the earned income tax credit $1,000 to protect lower income families. It provides some property tax relief but imposes a sales tax on previously untaxed services.

Additionally, HB 174 also directs a greater portion of funding into a Common Schools Account, to overcome the historic inequality between school districts across the state.

While the bill does offer some protections, many working families would still have to pay higher taxes at a time their budgets are being strained with increases in taxes and fees on a local level. A family of four at the median income of $56,000 and median property taxes of $3,300 would pay $600 more in taxes.

The bill's supporters argue Illinois taxpayers are among the lowest taxed compared to residents in surrounding states. But in a column run on the Galesburg Register Mail website, Judith Guenseth of Court Appointed Special Advocates for Children (CASA) notes, "Add to this the regressive nature of consumption and property taxes and the total picture means that compared to six neighboring Midwestern states, Illinois ranks second with the highest tax burden on the bottom 20 percent of Illinoisans."

Polls show voters strongly oppose higher taxes. However broad public support could be garnered if the bill were amended to totally protect families with incomes under $200,000 and increase the taxes on the wealthy and big corporations.

Comptroller Dan Hynes has proposed maintaining a 3% rate on taxpayers below $200,000 and increasing by 3.5% to 7% taxes on incomes for the top 3% of income earners. This change would require a constitutional amendment.

The Institute for Taxation and Policy suggests combining both Quinn's original proposal and Hynes super rich tax surcharge as the path to a progressive tax system. They also argue that taxing working families will remove additional purchasing power from the state economy, slowing the economic recovery.

If HB 174 passes it would raise about $6 billion in revenues, still leaving a gap of nearly $8 billion.

On Nov. 17, the AFL-CIO and major civil rights organizations announced a five-point plan to pull the country out of the economic crisis. In addition to calling for the government to fund the creation of 2 million public sector jobs, the plan calls for extending more federal aid to the states.

The American Recovery and Reinvestment Act granted $144 billion in aid to the states mainly through payments to cover Medicaid and education. This is widely regarded as one of the most effective uses of the economic stimulus money. Illinois has been able to pay Medicaid reimbursements to health providers only because it received $2.9 billion in short term aid from the Act.

The EPI calls for extending federal relief from the Act for $150 billion to state and local governments over the next 18 months.

A path out of the economic and state budget crises is needed that doesn't place additional burdens on working families and moves in the direction of redistributing social wealth more equitably. It will take the massive might of the labor-led people's movement, small and medium businesses, along with state, city and town governments to win.

Photo:Illinois State Capitol Daniel Schwen