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Taxing opportunitiesWednesday, April 22, 2009
Chicago Tribune
by Chicago Tribune editorial staff
Cook County
Assessor James Houlihan offered some dramatic ideas on our Commentary
page the other day: He wants to change the mix of taxes collected in
Illinois. One thing was missing: ideas from Houlihan on how his fellow Democrats in Springfield should slash spending and reduce the need for so much taxation.
But
to the extent he's talking about a tax scheme that would more broadly
and equitably tap growth in the state's economy, we're all ears. He
proposes to:
•Reduce the state portion of the sales tax.
•Collect sales tax on services as well as goods.
•Keep the corporate income tax at 4.8 percent.
•Hike the 3 percent personal income tax to 4.25 percent, expand the Earned Income Tax Credit and raise the personal exemption.
We
particularly like his approach to sales taxes: Houlihan wants the
broadest possible tax at the lowest possible rate. Specifically, he
would cut the state portion of the sales tax from the current 5 percent
to 3.25 percent and expand the tax to include services.
Currently,
Illinois collects sales tax only on the sale of goods—everything from
refrigerators and lawn chairs to steak dinners and sweaters. Your
dealings with an accountant, attorney, doctor, hairdresser, landscaper
and all those other service providers carry no sales tax. Yet, that is
increasingly where most economic growth has occurred.
Houlihan
cites statistics from a 2006 report by the Civic Committee of the
Commercial Club of Chicago to make that point: In 1965, goods
represented 32 percent of the state economy and services 63 percent. By
2004, goods made up only 13 percent of the state economy and services
77 percent. Yet, that 13 percent of transactions in goods continues to
carry the entire sales-tax burden. That's not fair. Houlihan estimates
that broadening the sales-tax base and reducing its rate simultaneously
would bring the state more than $1 billion in additional revenue each
year.
Houlihan also suggests nixing the sales-tax exemption on
food, which costs the state $800 million a year. Poor people could be
shielded from the regressive impact—a comparatively high share of their
spending goes for food—by increasing the Earned Income Tax Credit.
That's a smart idea.
Houlihan essentially is arguing that
solving Illinois' budget mess is to recognize what has been growing in
the Illinois economy. Broadening the sales tax does that. So does
encouraging employers to locate and expand here: More business means
more jobs—and that translates into higher tax revenues.
By contrast, Gov. Pat Quinn's proposed 50 percent increase in the corporate-income tax rate would discourage
employers from opening and growing here. Houlihan acknowledges a
reality the governor ignores—that the corporate-income tax is no longer
very useful. Only about 20 percent of corporations in Illinois pay it.
It's difficult to enforce against multinational corporations, and the
growth in e-commerce further complicates the picture: "Between 1980 and
2000," Houlihan says, "the ratio of state corporate income taxes
collected to corporate income declined by almost half (7.3 percent to
3.9 percent) while the ratio of state and local personal taxes and
charges to personal income more than tripled (1.1 percent to 3.4
percent)."
There's more to fixing this budget mess than
reordering the tax system, of course. Controlling spending, which for
two decades has been growing at double the rate of inflation, is critical to Illinois' economic future.
But
creatively rethinking the tax system as Houlihan suggests strikes us as
more fair, and more likely to encourage new jobs for Illinois, than the
tax scheme that Quinn has proposed.
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