Budget Control Act of 2011 Raises the Debt Ceiling, But At What Cost?

First the good news: last week’s agreement to raise the debt ceiling averted a catastrophic default on U.S. obligations that would have triggered a worldwide financial crisis. Now the bad news: the Budget Control Act of 2011 will immediately result in deep cuts to vital programs for vulnerable populations and will likely result in even greater cuts in the future, without balancing those cuts with increases in revenue. Indeed, it does not provide for any increase in revenue at all. Below is a summary of the main points of the accord, with analysis of what the resolution of this crisis bodes for the future.

The agreement raises the debt ceiling by $2.1 trillion, enough that it won’t have to be raised again until after the next presidential election in November 2012. The agreement also provides that the deficit will be reduced by more than $2 trillion over the next 10 years, with deficit reduction occurring in two steps.

Step one is a spending reduction of $900 billion over the next 10 years, accomplished with binding caps on annual appropriations bills. All of these cuts will be made to “discretionary spending”. Entitlement spending, including safety-net entitlement programs for low-income people, is exempt from being cut. In addition to the “big three” entitlement programs – Social Security, Medicare and Medicaid – other non-discretionary programs exempted from being cut include:

  • child care mandatory assistance;
  • child nutrition entitlement programs, e.g., school meals;
  • Children’s Health Insurance Program (CHIP);
  • child support enforcement and family support programs;
  • Pell Grants;
  • foster care and permanency programs;
  • Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps);
  • Supplemental Security Income (SSI);
  • refundable tax credits, including the Earned income Tax Credit and Child Tax Credit; and
  • Temporary Assistance for Needy Families (TANF).

Discretionary programs that are subject to the caps that will result in $900 billion in cuts over the next 10 years include:

  • discretionary (non-mandatory) child care assistance;
  • Head Start;
  • Women, Infants and Children (WIC) nutrition program for low-income women, infants and small children;
  • maternal and child health;
  • Title X family planning services;
  • low-income housing assistance;
  • low-income energy assistance; and
  • Older Americans Act congregate and home-delivered meals.

Step two is complicated. It begins with the congressional appointment of a 12-member deficit reduction super committee, with three members appointed by each legislative leader. The super-committee’s charge is to come up with a deficit-reduction package that saves at least another $1.5 trillion over the next 10 years. The super committee is free to consider all possibilities, including more cuts in discretionary spending, cuts in entitlement spending, and revenue-raising measures. If a majority of the super committee agrees on a proposal, then it will be submitted to Congress for an up-or-down vote by the end of this year.

If, as largely expected, the super committee does not reach an agreement on a deficit-reduction package -- or Congress does not approve the package or the President vetoes it -- then federal spending will automatically be reduced by $1.2 trillion over the next 10 years through a process called “sequestration.” Entitlement programs (listed above) would be exempt from cuts, and revenue would not be increased. Rather, all of the cuts would come from discretionary programs, with half of the reduction coming from domestic programs and the other half from defense spending. This would amount to a 9 percent decrease in both domestic discretionary spending and defense spending – an amount that many believe would seriously compromise national security. The cuts made by sequestration would not go into effect until January 2013.

Speaker Boehner has already announced that the U.S. House of Representatives will not approve any revenue increases that the super-committee may recommend. To understand what the impact of a “cuts only” proposal would be, it’s worth considering the deal that President Obama and Speaker Boehner recently discussed. That ultimately unsuccessful deal would have:

  • raised Medicare’s eligibility age and cost-sharing charges;
  • shifted significant Medicaid costs to states;
  • modified cost-of-living adjustments in Social Security and other benefit programs (and in the tax code); and
  • instituted other entitlement savings.

All of those steps would have saved $650-$700 billion over 10 years, representing only one-half of the cuts that the super committee will have to produce.

One other noteworthy provision in the Budget Control Act of 2011 is an agreement to allow an up-or-down vote of the House and the Senate this fall on a constitutional amendment to balance the budget, threatening to enshrine this popular but fiscally ruinous principle in the U.S. Constitution.

To sum up, the most disturbing aspect of the Budget Control Act of 2011 is that it achieves all of its savings through spending cuts despite polling that shows a large majority of Americans across all population sectors supports a balanced approach that includes increasing taxes on the wealthy and big corporations to help reduce the deficit. This cuts-only approach sets an extremely disturbing precedent for future budget and spending battles.

Second, although some of the most extreme proposals floated this year, such as a global spending cap or super-majority requirement to raise taxes or the debt ceiling, were not included in the final agreement, it does include the mandatory spending reduction mechanism of sequestration. And, while low-income entitlement programs are exempt from sequestration, discretionary programs on which low-income populations rely enjoy no such protection and are, in fact, under a direct threat to be heavily cut.

So what does the future hold? For one thing, it appears that Medicaid is now in the cross-hairs. Conservatives in Congress have consistently signaled a desire to scale-back Medicaid. They receive strong support for this agenda from conservative governors who seek the power to generate state budgetary savings if Medicaid is changed to allow them to cut the program and roll-back eligibility. It’s hard to see how any of this can be squared with implementation of the Affordable Care Act, whose health care reforms rely on expansion of the Medicaid program to insure 16 million currently uninsured people.

Now that the debt ceiling has been raised for the time being, the next flashpoint will be the adoption of a budget for the next federal fiscal year beginning October 1. Typically, no agreement is reached by that date, and the government continues to operate based on a series of “continuing resolutions” until a full-year budget is agreed upon. If one of these continuing resolutions runs out without an agreement to extend it, then the federal government shuts down. A sizable majority of the House Republicans just demonstrated their willingness to risk a global financial cataclysm to achieve their policy ends. There is little reason to doubt that they will be willing to engage in such brinksmanship again. Indeed, they may attempt to extract even greater concessions when all that is at stake is the continued operations of the federal government, since they will feel there is less to lose in provoking a crisis. The template for resolving such a crisis, as established by this debt ceiling deal–substantial spending cuts, no revenue increases, a mandatory mechanism to enforce deficit reduction–sets a bad precedent for future policy negotiations, unless different tactics are adopted by proponents of important spending priorities for struggling Americans.

Beyond that, there are a number of events that will be occurring in the lame-duck session just after the next presidential election in November 2012. The Bush tax cuts will be expiring; the January 2013 automatic sequestration cuts (assuming no super committee agreement that becomes law), including deep cuts in national defense, will be taking effect; and the debt ceiling will have to be increased again. The battles that were just waged thus are simply the prelude for many more to come. 

The Tally on Illinois's Fiscal Year 2012 Budget: Political Choices, Who Got Hurt

Illinois’s fiscal year 2012 (FY12) budget saga ended last week, at least for the time being. Governor Quinn approved a final budget, exercising his amendatory veto to make some further spending reductions. The General Assembly will meet later in the year to take action to approve or reject the amendments. 

The general trend of this budget is both better and worse than it could have been. Illinois needed to take major steps in a balanced approach to solving the state’s immense fiscal crisis. It needed to generate significant new revenue while also getting control of the spending side. In January, the General Assembly passed and the Governor signed legislation that made major progress on the revenue side. Without that step, the carnage in the budget would have been unthinkable, and Illinois would probably be in default on many fronts. On the spending side, however, while austerity was needed and expected, the final budget includes far deeper cuts in programs that serve Illinois’s most vulnerable populations, and some of its most important priorities, than were needed.

The final state budget includes about $2 billion less in spending than Governor Quinn had proposed at the start of the FY12 budget process in February. Some of the most damaging cuts for low-income people and other vulnerable populations are:

  • General State Aid to schools. The final budget is $400 million less than the Governor’s proposed budget. In addition, $400 million in federal funding that had been provided pursuant to the American Recovery and Reinvestment Act has ended. The greatest impact will be felt by school districts that rely more heavily on state aid because they are low-income and have lower local property tax revenues.
  • Community mental health services – cut by $55 million, or 20%.
  • Temporary Assistance for Needy Families (TANF) – 1/3 less funding allocated to TANF in FY12 than the amount needed to serve the current caseload, which has grown due to the recession, persistent high rates of long-term unemployment, and improvements in program access.
  • Elimination of the Transitional Assistance program that provided a small amount of income support to 9,000 not employable adults in Chicago.
  • Cuts of up to 50% in programs for very high-risk children, including teen after school and children’s mental health programs.
  • Early Childhood Block Grant – cut $17 million, a 5% reduction on top of last year’s 10% reduction. Will result in 4,000 fewer three- and four-year-olds being enrolled in preschool for all and 1,000 fewer high-risk children aged 0-3 receiving developmental screenings and other services.

These severe cuts have been justified as necessary to “live within our means,” but the truth is that these cuts were not dictated by economics but rather were the product of political considerations.

The adoption of a temporary increase in the state income tax from 3% to 5% during the January “lame duck” session, just before the newly-elected legislators took office, triggered the series of events that led to these cuts. Speaker Madigan’s immediate concern in the wake of the Democrats’ decision to approve a tax increase was the size and strength of the backlash his members would face for that vote. He used the FY12 budget process to attempt to insulate them from this backlash.

The first thing the Speaker did was to make the budget process in the House bipartisan, a departure from past practice. Speaker Madigan and Minority Leader Cross collaborated closely throughout the budget process, and rank-and-file Republican members were included in budget deliberations.

The next step was to adopt a lowball revenue estimate that would necessitate bigger than needed cuts. The House ignored the revenue estimate of the General Assembly’s own bipartisan revenue-estimating agency and instead worked off an estimate prepared by the Governor’s Office of Management and Budget, making some downward adjustments. As a result of the lowball estimate it used, the House had $1 billion less to appropriate than the Senate. When, later in the session, the Governor’s office, based on more recent economic information about the performance of the Illinois economy, revised its estimate upward to the Senate level, the House did not come along.

Next the House locked itself into the lowball revenue estimate by passing a resolution that required any revenues collected in excess of the lowball estimate be solely devoted to paying off old bills, preventing such additional revenue from being used to ameliorate the effects of harsh budget cuts.

The House and Senate passed separate budgets based on different revenue estimates. There was no real effort to reconcile the two budgets, as House members adhered to their resolution and refused to apply any additional revenues to reduce the cuts. No compromise was offered as the May 31 deadline for adopting a state budget without needing a super-majority loomed. Rather than bring the Senate Republicans, who had earlier proposed a budget with several billion more in cuts, into the budget process, the Senate Democrats capitulated to the Speaker and passed the House budget.

Senate President Cullerton made a last-ditch attempt to restore about half of the House’s cuts by attaching an amendment to the bill authorizing the expenditure of funds on capital projects, e.g., roads. When Gov. Quinn announced that summer construction projects would be halted in mid-June if the capital bill was not passed by both Houses, it appeared that he and President Cullerton might have teamed up to exert leverage on the Speaker. But in the end, Gov. Quinn called on the Senate to give in and drop the amendment so that construction could continue as scheduled. 

How could deeper-than-necessary cuts have been avoided? The Responsible Budget Coalition and others championed a number of reasonable proposals to obtain the revenue needed to avoid devastating cuts without raising taxes. The most obvious one of these was to revise the revenue estimate upwards. Another recommendation was that Illinois “decouple” from a change in federal tax law that accelerated the depreciation schedule for big corporations that make large equipment purchases. Under Illinois’s tax code, absent action by the General Assembly, Illinois tax law would automatically provide this tax break as well. In the past, Illinois has de-coupled from similar changes in federal tax law to avoid major revenue losses. But this time around decoupling was falsely labeled and rejected as a “tax increase,” even though no one’s taxes would have gone up (they just wouldn’t have gotten a windfall reduction in state taxes). Decoupling would have saved the state $600 million in lost revenue and allowed the state to avoid making all of the painful cuts described above.

So what are the prospects for the future? We said above that the general trend was at least partially positive because the revenue increase balanced the state’s approach to the fiscal crisis. Now Illinois needs to return to policy considerations (instead of just political ones) before making any further cuts to vital programs and priorities. It needs to find better ways to deploy state revenues, so that more is dedicated to high priorities in the general revenue fund as opposed to lower priorities in special funds that are off budget. It needs to find a way to address the state’s $4 billion of unpaid bills.

What this budget also shows is that there was very little fat to cut. Much of what was cut was not fat at all, shortchanging wise investments like early childhood education and tragically abandoning vulnerable people. The income tax increase enacted in January is only temporary, with a large part of it phasing out after four years. The Illinois revenue problem was structural -- we did not have enough revenue to pay for the important priorities that Illinois residents rightly expect from their government. That problem was well known before the recession hit. This year’s budget includes the new revenue, makes the pension payment for the first time in years, was overly austere on the spending side – and STILL did not pay the bills. Illinois needs to reconcile itself to the fact that the revenue increase must be permanent. 


A Portrait of the Uneven Recovery--And What to Do About It

Board of WorksOfficially, the recession ended in June 2009. But for many Americans, the recession is still in full force. New research shows that the recovery is not being evenly shared. Overall, workers’ earnings are down because the jobs that are hiring pay less than the jobs that were lost. Minorities face much higher unemployment and live disproportionately in states which have the worst economic climate. Young people face especially daunting job prospects. So perhaps it’s no surprise that a recent CBS/New York Times poll shows that only 23% of Americans think the economy is getting better.

Meanwhile, politicians in Washington are discussing budget cuts that could derail the recovery and undermine our long-term competitiveness. Right now, we need to invest in the infrastructure of job training and education, which is a driver of our economy and will help put Americans back to work.  

Well-Being Is Not Improving After the Recession
The Center on Social Exclusion went beyond just measuring gross domestic product to examine 14 indicators of well-being in four categories (housing, health, jobs, and socio-fiscal). Looking back over the last 18 months, the study found that most states had not improved their well-being. Many are still treading water, and 15-24 states have actually continued to lose ground in each of the categories. Furthermore, states with higher percentage minority populations have fared worse on these measures than predominantly white states.  

Unemployment Is Improving Slightly,
But Long-Term Unemployment Continues to Worsen

Private sector hiring is improving, but even with 216,000 new jobs in March we have a long way to go. There is still only one job opening for every four unemployed workers. We need to add 127,000 new jobs every month just to keep up with population growth. At this rate it would take five and a half years just to halve the unemployment rate down to a more acceptable 4.4%. There at 13.5 million unemployed Americans who are actively seeking work, plus 8.4 million Americans who are working part-time only because they can’t find full-time jobs, and at least another 2.4 million who would like to work but aren’t looking right now. The length of time workers are unemployed is still inching up; half of those unemployed have been looking for five months or longer (the average amount of time out of work is now nine months and rising). The overall unemployment rate is 8.8%, but the rate remains especially high for those with limited education, Hispanics (11.9%), Blacks (15.5%), teenagers (24.5%), those aged 20-24 (15.0%), veterans who’ve served since 2001 (10.9%), and persons with a disability (15.6%).  

Real Earnings Are Falling While Corporate Profits Soar
While more Americans are finding work, wages and earnings are heading in the wrong direction.

The economy has been expanding for almost two years. Real corporate profits neared an all-time high in 2010, and top CEOs earned 23% more in 2010 than 2009. But the gains in productivity generated by American workers are not ending up in their pocketbooks. Instead, the Wall Street Journal reported last month that, while productivity has climbed 5.2% in the first 18 months of the recovery, that had translated into record profits for shareholders, not higher wages for workers. In fact, since that story broke, real hourly wages have fallen more than 1% in the last two months alone. And that’s not an isolated blip. From March 2009 to March 2011, the average American worker lost 1% of their total earnings in real terms. 

Good Jobs Lost During the Recession Are Being Replaced By Low-Wage Jobs
The National Employment Law Project released a report that shows that while the recession’s job losses were concentrated in higher-wage industries (especially construction, non-durable manufacturing, finance/insurance, and information), the limited job gains since have come disproportionately in the low-wage industries (temporary jobs, retail, administrative support, and the service sector).  

We Must Re-Invest in an Equitable Recovery That Creates Jobs
We need to invest in education and training for American workers so we can innovate, grow the economy, and create jobs that pay a family-sustaining wage. The president has called on all Americans to get at least one year of education or training after high school. That extra education is critical; workers over 25 with some college or an associate’s degree currently have an unemployment rate of 7.7%, compared to 10.5% for high school grads and 15.2% for those with no high school degree. Last year, the federal Workforce Investment Act system, which provides training and job search assistance, served 8.4 million Americans and helped 4.3 million get jobs.

But our national infrastructure for job training and education is under threat. The continuing resolution recently passed by Congress to fund the government through fiscal year 2011 cut $1 billion from our nation’s investments in job training and education, though even further cuts were averted. And House Budget Chairman Paul Ryan’s long-term budget proposal, which passed the House on April 15, included naïve assumptions about Pell grants, community colleges and the workforce development system, and drastic (though still vague) cuts to these critical programs. It should be obvious, but now is not the time to cut job training and employment services. Solving our budget crisis is important, but slashing the workforce development system will undermine our future competiveness and growth. Right now, we need to get Americans back to work.


Comparing Ryan and Obama Long-Term Budget Plans: Two Starkly Different Visions

Here is how the long-term budget plans recently put forth by House Ways and Means Committee Chairman Paul Ryan and President Barack Obama compare on several critical factors.

Deficit Reduction
All agree that reducing the United States’ current $14 trillion indebtedness is a critical national priority. The President’s plan would reduce the deficit by $4 trillion over 12 years, enough to stabilize the national debt so that it increases no faster than the economy. Rep. Ryan’s plan would have no perceptible impact on the federal deficit, since by his own estimation, his proposed $4.3 trillion in spending cuts are entirely offset by his proposed $4.2 trillion reduction in taxes.    

Balanced Approach and Shared Sacrifice
President Obama follows the
Bowles-Simpson deficit reduction commission’s recommendation that deficit reduction be 2 parts spending cuts to 1 part revenue increases. 50/50 would be a fairer balance, but there is at least the semblance of shared sacrifice as the wealthy are asked to give up their Bush era tax cuts when they expire next year.

Congressman Ryan’s budget has no balance or shared sacrifice. At least 2/3 of his recommended spending cuts are to programs for people of limited means, and he not only asks for no contribution from the wealthy but significantly enriches them by making the Bush tax cuts permanent, further weakening the estate tax, and lowering the top tax rate from 35 to 25%.

Distribution of Spending Cuts
The President would cut defense spending by $400 billion over 12 years and would also cut agricultural subsidies. Ryan’s budget does not cut in either of these areas, thus unfairly concentrating his proposed cuts on only limited parts of the budget.

Investing for the Future
While the President’s plan makes deep spending cuts in a number of areas, it also includes spending increases in areas he identifies as drivers of economic growth, including energy innovation, education, health care reform and infrastructure. Ryan’s budget makes no investments for the future.

Health Care
The fundamental differences between the Ryan and Obama plans come into high relief when their recommendations for the publicly funded health care programs Medicare and Medicaid are compared.

Ryan’s health care plan includes no cost containment measures and would, according to the non-partisan Congressional Budget Office, substantially raise overall costs for Medicare beneficiaries. It lowers federal health care spending solely by shifting costs on to the states and the elderly, disabled and low-income people who participate in these programs. Ryan would cut Medicaid funding by $1.4 trillion over the next ten years; Illinois’s share of this cut would be $47 billion.

In addition, Ryan would “block grant” the Medicaid program, meaning the amount of federal funding the state receives each year would be fixed and would not be adequately adjusted for such cost drivers as medical cost inflation, growth in the population, and aging of the population. The impact of block granting Medicaid would be harshest during recessions, when federal funding would no longer automatically increase to assist more people who lose their jobs, income, and health insurance. This would not only increase hardship and destitution in recessions, but also would further weaken a slumping economy and lead to the loss of many more jobs. And it would deprive states of one of the most important forms of enhanced federal support during recessions, deepening state fiscal crises and crippling the ability of states to meet the greater needs of their citizens in recessions.

Ryan would also end the Medicare program, which provides guaranteed health care to all persons over 65. He would replace it with a voucher paid to private health insurance companies that would shrink in value over time, shifting more and more of the cost of health care onto the elderly.

Obama proposes to bring down the cost of coverage by bringing down the cost of health care itself, instead of just shifting the cost. He would build on the cost containment measures in the Affordable Care Act, producing $100 billion in savings over twelve years from actual cost reductions. There would be no cost shifting to the states or program participants. He would not block grant Medicaid nor would he end Medicare.

Political Courage
Rep. Ryan’s plan imposes over 2/3 of its spending cuts on the politically safest target, low-income people, while offsetting all spending savings with extremely large tax breaks for the wealthiest Americans, accomplishing no net deficit reduction at all. He asks for no sacrifice from his base, and he creates clear winners among the financial backers of his political party. 

President Obama’s plan provides a balanced approach (albeit relying somewhat too much on spending cuts and not enough on revenue increases), shared sacrifice, and real deficit reduction without undermining the fundamental structure of our health care safety net programs. There will be significant pain among core elements of his base. The President leveled with the American people, making clear that the solution will not be achieved by magical elimination of “waste and abuse” or reduction of programs like foreign aid, but instead by austerity in basic programs and services that the vast majority of Americans want or need and a shared responsibility to produce needed revenue.

The Shriver Center acknowledges the Center on Budget and Policy Priorities analysis of the Ryan and Obama plans, on which this piece relies heavily.


Congress Passes 2011 Budget

Yesterday the Congress passed a bill that will fund the federal government for the rest of fiscal year 2011.

Overall, the very worst cuts—ones that would have devastated vulnerable Americans and taken us off the road to economic recovery—were avoided. For instance, the appropriations to implement the Affordable Care Act were preserved, which will improve the lives of millions of Americans and save the federal government hundreds of millions of dollars. Our federal funding of education at all levels—from Head Start to K-12 to Pell grants for college, will hold steady. The appropriations to the new Consumer Financial Protection Bureau are intact.

However, there were many deep and important cuts that will negatively affect low-income Americans and their communities.

There are tough choices and important work ahead, including the fiscal year 2012 budget, which is being debated now. The cuts made to the federal fiscal year (FFY) 2011 budget, difficult as they are for many low income people, are dwarfed by some of the proposals for cuts being floated for FFY 2012, including the House Republican version that passed the House today on a partisan vote. And the standoff and political difficulties that surrounded the finalization of the FFY 2011 budget six months after the fiscal year began now look easy compared to the fundamental and high-stakes debates that will take place before there is an FFY 2012 final budget. Stay tuned.


The Amazon Battle Continues: Governor Quinn Signs the Illinois Internet Sales Tax Law

Cash RegisterOn Thursday, March 10th, Governor Pat Quinn signed the Illinois internet tax law (Public Act 096-1544) which will take effect immediately. This controversial law, which requires online retailers that work with affiliates in the state to collect sales tax on purchases made by Illinois residents and businesses, has been drawing heated debate across America.

A series of U.S. Supreme Court decisions starting in the late 1960s relating to catalog and mail order companiesNational Bellas Hess Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992)—have precluded states’ internet taxing authority. According to these cases, collecting different state and local sales taxes was too complex, placed an undue burden on catalog and mail order companies, and was an unreasonable restriction on interstate commerce in violation of the Commerce Clause. The Supreme Court therefore held that only states in which a company has a nexus, i.e., the physical presence of retail outlets or distribution centers, can be required to collect sales taxes.

Technology has since made computing sales tax effortless, and so the justification for the Court’s original ruling is gone. In fact, two other Supreme Court decisions—Scripto Inc. v. Carson, 362 U.S. 207 (1960) and Tyler Pipe v. Washington Department of Revenue, 438 U.S. 232 (1987)—have held that an out-of-state seller is deemed to have a nexus through a physical presence in a state if it uses in-state third parties to help establish a market for its goods within the state.

Modeled after a 2008 New York law, the new Illinois law expands the meaning of “physical presence” beyond a warehouse, factory, or office to include marketing or affiliate companies and website operators who earn commissions for guiding consumers to online stores. Since it has long been established that states can require out-of-state sellers to collect sales taxes if they use independent, commission-based representatives to solicit business within the state, New York’s—and now Illinois’s—laws deem a retailer to have a physical presence within the state when it has independent affiliate websites promoting sales on its behalf within the state. Such affiliates place links on their websites to the retailer’s site and receive a commission when someone follows the link and buys something from the retailer.

As states continue to struggle with the effects of the recession, many are exploring options to increase revenue through internet sales tax laws. The Illinois Department of Revenue estimates that it loses between $153 and $170 million in revenue from uncollected internet sales tax. Nationwide, uncollected online sales taxes reached $8.6 billion in 2010. Legislators in at least seven other states introduced similar bills last year, and legislation passed in North Carolina and Rhode Island, but California’s, Hawaii’s, Connecticut’s and Minnesota’s bills were vetoed by their governors.

Amazon currently collects sales tax in New York—but has a lawsuit against the constitutionality of New York’s 2008 legislation—and in Washington, where it is headquartered, and Kansas, Kentucky, and North Dakota, where it has warehouses. Thus far, Amazon’s legal challenge has been unsuccessful, but regardless of its success Amazon may be on its way out of dominance as it continues to build warehouse and fulfillment centers in more locations. Texas’ Comptroller, for instance, recently sent Amazon a $269 million bill equal to four years of sales taxes to Amazon because it has a warehouse in Texas.

In response to the passage of the new Illinois legislation, Amazon notified its Illinois affiliates that it will terminate its contracts with them and stop paying advertising fees to Illinois residents who refer customers to Amazon.com, Endless.com, or SmallParts.com on April 15th. Overstock also notified its Illinois affiliates that it will cut ties with them as of May 1st unless the law is repealed or the affiliates move to another state without a similar law. Amazon has also threatened to cancel its 10,000 affiliate contracts in California if California’s third legislative effort in three years to pass legislation (AB 153) is successful. In the meantime, Wal-Mart, Sears, Best Buy and Barnes & Noble have issued public invitations to the any affected affiliates to join their affiliate programs instead, and the Alliance for Main Street Fairness, a brick-and-mortar retailers’ organization, has created a new website to connect terminated affiliates with retailers who already collect online sales taxes.

Amazon’s termination of its Illinois affiliates does not have much impact on Illinois consumers. They can continue to buy directly from Amazon or through affiliate websites despite the fact that Amazon will not be collecting the sales tax. Technically, however, under Illinois’s Use Tax Act customers have always been, and will continue to be, required to pay sales tax whether or not the retailer collects it. Moreover, Illinois recently implemented an amnesty program allowing customers to pay sales and use taxes on past online purchases, between June 30th, 2004, and December 31st, 2010, without penalty. Under the amnesty program, which lasts until October 15th, consumers can pay this tax as part of their Illinois Form IL-1040 income tax.

Read the Shriver Center’s previous blog on the Amazon tax law for more information.

This blog post was coauthored by Ji Won Kim.


Principles to Guide the Budget Cuts - Strengthen Our Economy and Protect Our Most Vulnerable

Part 2: The President's 2012 Budget 

In addition to the continuing continuing resolutions being passed by Congress, policymakers are now turning their attention to the 2012 budget. The House is expected to release a proposal soon. And the President has released his proposal for the fiscal year 2012 budget.You can check out the White House proposal in a visual format with the New York Timesinteractive budget graphic, and find highlights and analysis in our prior blogpost. Without careful analysis and a balanced approach, deficit-reduction efforts could have unintended and unwanted consequences. The economic recovery, our nation’s fiscal health, and the well being and economic security of American families all rest in the balance. In a recent post, we laid out four principles that should guide our budget cutting. Briefly, they are:

  • Evenly Balance Spending Cuts and New Revenues; Austerity Is Not the Answer
  • Evenly Balance Defense and Non-Defense Discretionary Spending
  • Avoid Making Low- and Moderate-Income Households Worse-Off
  • Make Wise Investments in the Future--to Ensure the Economic Recovery and Economic Security for All Americans

 Here’s how the President’s proposed budget stacks up by our principles:

Currently, the President’s 2012 proposal is to reduce the deficit with two-thirds cuts, and one-third new revenue. The budget should go further to eliminate inefficient corporate tax loopholes and governmental subsidies. By increasing revenue in responsible ways, we will reduce the need to make drastic and unwise cuts, such as the President’s proposal to slash the Low Income Home Energy Assistance Program. And the budget must share the burden of cuts more equitably. Currently, the budget calls for zero real growth in military spending, but that’s only a 5% reduction from the 2011 request.

Wisely, the President’s budget invests in our future in several ways. It increases funding for K-12 education, provides short-term spending on surface transportation that will create jobs, and long-term investments in innovative technologies and policies that will sustain our recovery. Additionally, the Obama Administration has proposed a $100 million dollar “Pay for Success Bond” program in his fiscal year 2012 budget. If carefully implemented, social impact bonds are a promising development. This funding mechanism allows the funder (which could be private foundations or the government) to pay for innovative social service provision entirely or largely based on whether the providing organization meets agreed-upon performance measures. That spurs effective, efficient programs, and ensures that those programs that don’t work end. 

We need to make cuts to control the federal deficit, but doing so blindly will cost jobs and destabilize the fragile economic recovery. Austerity is not the answer. We must be fiscally responsible and still fulfill our responsibility to the most vulnerable in our society. By investing in education and training and funding innovation, we will have a stronger economy. A stronger economy will increase tax revenues in the future and help balance the budget, while strengthening the middle class and helping Americans make ends meet and pursue the American Dream.

Principles to Guide the Budget Cuts--Strengthen Our Economy and Protect Our Most Vulnerable

Talk of federal budgets has reached fever pitch in Washington, as politicians, advocates, and the public around the country try to address competing interests of profound importance (and score political points, too). Let’s get our heads on straight—this is important and we need to do it right. The economic recovery, our nation’s fiscal health, and the well-being and economic security of American families all rest in the balance. This post will share several principles we believe should guide the important work of deficit reduction, and then take a look at the House’s proposed Continuing Resolution. Soon, we’ll have another post analyzing the President’s fiscal year 2012 budget proposal.

Without careful analysis and a balanced approach, deficit-reduction efforts could have unintended and unwanted consequences. Poorly crafted policies could inadvertently cost our country both jobs and the job supports that help individuals be productive and will help the economy thrive in the future. Austerity will prolong the weak economy; investments will strengthen it. Moreover, ill-conceived measures could weaken the middle class, making it out of reach for those with the greatest need of assistance—children, working families, seniors, people with disabilities, and many others. Finally, cuts to effective programs will prove a Pyrrhic victory; saving a bit of money now will cost us all much more in the end.

Ultimately, there are three ways to reduce the deficit: reduce spending, increase taxes, and grow the economy so the tax base increases. No one of these alone will end the deficit, all three must be balanced, and each is interrelated. Here are the principles that should guide the budget planning ahead:

Evenly Balance Spending Cuts and New Revenues; Austerity Is Not the Answer. Growth in the deficit is not due solely to spending; it’s due to an imbalance between spending and revenues. Trying to reduce the deficit through spending cuts alone would require making drastic cuts in effective and important investments that are key to long-term economic growth. In fact, according to the most recent evidence, the countries that  pursued austerity instead of stimulus had short-lived growth and are now lagging behind the United States. Cutting government spending in a time of recession will exacerbate the ongoing unemployment crisis by causing significant job loss. Thus, spending cuts should not account for more than half of the equation.

Evenly Balance Defense and Non-Defense Discretionary Spending. There cannot be any sacred cow; even military spending will have to be reduced. Requiring equal percentage cuts from defense and non-defense categories was endorsed by the bipartisan National Commission on Fiscal Responsibility and Reform.

Avoid Making Low- and Moderate-Income Households Worse Off. As the President said in his State of the Union address, deficit reduction is necessary, “[b]ut let's make sure that we're not doing it on the backs of our most vulnerable citizens.”

Make Wise Investments in the Future to Ensure the Economic Recovery and Economic Security for Americans. Strengthening our overall economic recovery demands that we invest in people. The President touched on this theme in his State of the Union address: “Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may make you feel like you're flying high at first, but it won't take long before you feel the impact.” To grow the economy, the country’s priority must be job creation. Higher employment and better jobs will rebuild the middle class and reduce the deficit. 

H.R. 1 – The House’s Continuing Resolution for 2011

The stars have aligned so that there are two strands of debate going on right now about the federal budget.

The President just unveiled his fiscal year 2012 budget. You can check out the proposal in a visual format with the New York Times’ interactive budget graphic, and find highlights and analysis in a prior blogpost. Soon, we’ll have another post analyzing the President’s fiscal year 2012 budget proposal.

The big debate this coming year will actually be about the budget for the remainder of fiscal year 2011. Congress never appropriated funds to government agencies for fiscal year 2011, and the current stop-gap continuing resolution (CR) expires on March 4. The House has passed a CR with $61 billion in cuts as compared to FY 2010 spending, which is approximately $100 billion compared to the administration’s 2011 funding request. These cuts would go into effect almost immediately and apply to this fiscal year, which ends September 30. The Senate will take up that bill next week. Both the House and Senate may consider shorter CRs to avert a government shutdown.

The House CR is unfairly weighted to harm our most vulnerable. It is over 80% domestic discretionary and international cuts, and less than 20% cuts from military, homeland security, and veterans programs. Wisely, the House stripped $450 million that had been slated to build a second, alternate engine for the F-35 airplane.

The House CR makes drastic cuts in a dizzying array of critical programs (you can find a 21-page spreadsheet of cuts here). These cuts are radical, imbalanced, and profoundly unwise:

·         Education: The CR provides $2 billion less than the President requested for Head Start in 2011 (which is $1 billion less than was spent in 2010), reducing enrollment by 218,000 children. The CR also provides $5 billion less for the Department of Education, which will reduce funding for K-12 schools that serve one million low-income children. And, the CR imposes a 17% reduction in the maximum Pell Grant award, which makes college affordable to many Americans.

·         Social Security Administration: The CR would cut $1 billion from the President’s FY 2011 request. These cuts will exacerbate the significant delays disabled Americans suffer when they apply for benefits.

·         Food security: The CR would reduce Meals on Wheels to the elderly, which help keep elderly people living in their own communities, which is both more dignified for our elders and more economical for the government. The CR would also reduce food safety inspections, which would actually require meat and poultry plants to shut down, causing losses of $11 billion.

·         Health: Many amendments to the CR would block funding of the Affordable Care Act and make cuts in critical initiatives, including cuts to community health centers and eliminating funding for Planned Parenthood.

·         Housing: The CR would slash the public housing capital fund by $1 billion, which will further the disinvestment in public housing and likely lead to greater demolition in the future, reduce the critical Community Development Block Grant fund by nearly $3 billion, and reduce other housing programs that provide assistance for the elderly and disabled.

·         Jobs and Training: The CR entirely eliminates funding for Title I of the Workforce Investment Act, which provides job training to 8.5 million job seekers around the country, as well as YouthBuild and AmeriCorps, which are critical programs that create opportunities for public service for young Americans.

·         The House CR also reduces funding for science, health research, technology, and innovation. Such unwise cuts will cost the government more in the long run and will hamper our nation’s return to long-term prosperity.

This bill would add to our unemployment crisis. One million jobs will be lost if H.R. 1 goes into effect. The unemployment rate has been at or above 9% for nearly two years, and the Congressional Budget Office expects it to remain that way for the rest of the year. In fact it predicts elevated unemployment through 2016. The House CR would undermine the fragile recovery and the economic security of American families.

We need to make cuts to control the federal deficit, but doing so blindly will cost jobs and destabilize the fragile economic recovery. Austerity is not the answer. We must be fiscally responsible and still fulfill our responsibility to the most vulnerable in our society. By investing in education and training and funding innovation, we will have a stronger economy. A stronger economy will increase tax revenues in the future and help balance the budget, while strengthening the middle class and helping Americans make ends meet and pursue the American Dream.


The Budget Plan: An Opening Move in a Bigger Game

On February 14, President Obama announced his budget blueprint for federal fiscal year 2012 (which starts on October 1, 2011) and beyond. According to the White House, the budget proposal:

  • Freezes for five years the funding level of domestic discretionary programs (all non-entitlement programs that are appropriated each year, like Food Stamps, aid to education, and many social programs), which will produce a $400 billion deficit reduction and the lowest level of this kind of spending (as a percentage of the economy) since Eisenhower was president.
  • Over the next decade, reduces the deficit by over $1 trillion, with two-thirds of the reduction coming from spending cuts.
  • Ends the Bush-era tax breaks for high-income earners.
  • Promotes electric cars, clean electricity, and reduced energy use in large buildings.
  • Preserves maximum Pell grants, but cuts year-round and graduate school aspects of the Pell program.
  • Supports 100,000 new science, technology, and math teachers and imports the Race to the Top competitive concept into funding for early childhood education, universities, school districts, and job training.
  • Expands surface transportation improvements and broadband installation.
  • Makes 200 funding terminations or cuts totaling $33 billion in FY12, including cutting Community Development Block Grants by $300 million and the Low Income Home Energy Assistance Program (LIHEAP) by $2.5 billion.
  • Cuts $78 billion from the Pentagon’s spending plan over the next five years, which results in zero real growth for defense spending.

There are many, many more features to the budget announcement. This is just the Administration’s blueprint. It is subject to dozens of hearings in Congress, many committee votes, and ultimately a number of floor votes on appropriations bills, all of which are aimed at producing a final budget before next October 1. That is a feat that rarely happens in recent years; indeed, Congress never passed a budget for the current year, and the government is operating on continuing resolutions.

The Center on Budget and Policy Priorities, usually a strong supporter of domestic spending priorities, has released a statement emphasizing the importance of the deficit reduction aspects of the President’s plan and supporting most of the austerity measures (other than the LIHEAP cut). But critics on the left are unhappy with the domestic spending cuts that they feel could have been funded by deeper defense cuts or higher taxes on the wealthy.

On the other hand, the reaction from the Republican-controlled House has criticized the Administration’s plan for not cutting enough. The Republicans’ own proposal continues the tax cuts for the wealthy and would impose cuts to vital programs that are several orders of magnitude larger and wider than those in the Obama plan.

The cavernous divide between the Administration’s proposal and the House Republican proposal sets up the budget debate for the coming year. Since the election gave control of the House to the Republicans, it will be impossible to pass a budget without them. That and the magnitude of the deficit are the twin realities facing the Administration. The situation seems ripe for a showdown next fall. In fact, the House Republicans are spoiling for a fight even before thatin the next few weeks they are threatening to withhold passage of an expansion of the national debt limit, as hostage for current year budget cuts. In the past, the debt limit has been sacred ground that even the most doctrinaire legislators have left out of the partisan games. Default on our debts and international pariah status has never before been an option, but now we have a new breed of zealots who do not seem to care about that.

In that context, the President’s plan can be seen as an early gambit in the struggle to win over the majority of the publicthat is, to win the center. If a showdown comes, which side will the public perceive to be responsibly tackling the deficit while protecting important priorities, and which side will be perceived as irresponsibly extreme?

The Administration’s suggested cuts to programs that help low-income people are deeply concerning and should be re-thought. But budgets are also about values and the big picture national direction. The big picture struggle in this budget involves starkly different approaches to the deficit, national revenues, and the ongoing role of government spending in the creation of jobs, opportunity, and social justice. It is hard to overstate the importance of this larger struggle as the country heads into a watershed election season in 2012. The President’s budget plan is a move in a game that is much bigger than one year’s budget.


Federal Tax Agreement Benefits Low-Income, Working Women

Mother and daughterThe Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed in December, not only benefits low-income, working families and the unemployed but also supports policies that provide relief for working mothers and female-headed households. Tax credits such as the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) help reduce poverty and promote financial stability among low-income, working families. Such families are disproportionately female-headed households. One-third of working mothers are the sole wage-earners in the family—they are the heads of households or their spouses are out of work.

The American Recovery and Reinvestment Act of 2009 (ARRA) expanded the CTC and the EITC to include more families with larger tax credit amounts; the tax agreement extends the expansion and includes other supportive policies that benefit women and low-income families. According to a report by the White House, women represent 60 percent of the parents benefiting from the EITC and CTC expansion and will continue to benefit from the recent extension.

The CTC assists low- and moderate-income families with children by reducing their federal tax burden. The ARRA’s expanded provisions allowed for a lower-income threshold to qualify for the credit and increased the credit from $500 to $1,000, letting more of a family’s income to be counted toward the credit. These provisions have been extended for two more years. Eight million women and six million families headed by a single mother will benefit from the larger CTC because of the extension. The CTC has been regarded as a powerful tool for fighting poverty among families with children.

The EITC supplements the wages of low-income, working women and families by offsetting federal payroll and income taxes. The tax agreement extends the ARRA expansion of a higher credit amount for families with three or more children and reduces the marriage penalty. The EITC lifts more children out of poverty than any other single program or category of programs. The agreed-upon extension means that about six million women and one million families headed by single mothers will receive an expanded EITC tax credit.

All this will direct substantial resources to women and families headed by single mothers and alleviate their economic hardship. Moreover, the tax agreement contains provisions that benefit all low-income families, students, and the unemployed:

  • Workers’ take-home pay will be larger. The tax agreement cuts for two years the rate for the individual payroll taxes used to fund Social Security by 2 percent. This will boost workers’ take-home pay and will keep 900,000 workers out of poverty while stimulating the sluggish economy.
  • Federal unemployment benefits are extended through 2011. The extension will prevent seven million jobless workers from losing essential income support. This provision had been estimated to create 600,000 to 900,000 jobs next year alone. The extension ensures that workers have access to financial support while they search for work; it also benefits families with children.
  • The American Opportunity Tax Credit (AOTC) is extended. The AOTC provides a partially refundable tax credit of up to $2,500, making college costs and tuition more affordable for students and families. The tax agreement makes permanent the deduction of student loan interest—a tax incentive that provides relief for those paying off student loans. This will have a favorable effect on women’s economic achievement and growth.

These specific provisions in the tax agreement protect working mothers, low-income families, students, and the unemployed in many respects. Increasing take home pay, reducing the tax burden for low-income families, and providing support for jobless workers are all effective antipoverty policies and a sound economic stimulus as well.

The Amazon Battle: Illinois Passes Legislation to Recoup $150 Million in Internet Sales Tax

Cash registerAs the effects of the recession continue to unravel across the country, many states are struggling to secure funding for essential programs. One notable solution that is gaining momentum is broadening the sales tax by collecting taxes on remote sales and Internet sales.

Sales taxes are imposed on goods and services and are generally accepted by the public because they are paid in small increments at the time of purchases, so their cumulative value is not seen. Yet, a number of states, including Illinois, do not apply sales tax to movies, books, music or computer games that are purchased online, even though the tax would apply if the transaction took place in a brick-and-mortar store. Usually, a seller collects the tax at the time of purchase and remits it to the state. Even if the seller does not collect the tax, a purchaser is still legally obligated to pay it, though very few do. 

One reason for states’ failure to collect Internet sales taxes is because until recently it has been unclear whether or not a state can legally require an Internet seller to collect the tax. A series of U.S. Supreme Court decisions starting in the late 1960s relating to catalog and mail orders--National Bellas Hess Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992)--appear to preclude states’ taxing authority. 

According to these cases, understanding, administering, and collecting different state and local sales codes were too complex and placed an undue burden on catalog and mail order companies as well as an unreasonable restriction on interstate commerce in violation of the Commerce Clause. Instead, the Court held that only states in which a company has a nexus, through the presence of retail outlets or distribution centers, can be required to collect sales taxes.

Yet, technology has made computing sales tax less burdensome so the justification for the Court’s original ruling is gone. In fact, two other Supreme Court decisions--Scripto Inc. v. Carson, 362 U.S. 207 (1960) and Tyler Pipe v. Washington Department of Revenue, 438 U.S. 232 (1987)--seem to establish that an out-of-state seller is deemed to have a nexus through a physical presence in a state if it uses in-state third parties to help establish and maintain a market for its goods within the state.

The rapid increase in Internet sales has created a corresponding loss of state sales tax revenue. Illinois, for example, estimates it lost $150 million in sales tax due to online commerce and neighboring Michigan lost an estimated $414 million due to remote sales the state during fiscal year 2010.

The clearest guidance on the legality of taxing remote sales would be for Congress to mandate that companies must collect these taxes. The Main Street Fairness Act (H.R. 5660) was introduced in the 111th Congress in July 2010 to “require all remote sellers not qualifying for the small seller exception to collect and remit sales and use taxes on remote sales owed to each such member state.” Although the legislation did not pass it is likely to be reintroduced this year. 

In the meantime, several state-based efforts are underway to address this issue. First, through the Streamlined Sales Tax Project, twenty-three states, including Illinois, are working together to standardize their sales tax codes to reduce the burden on sellers to collect sales taxes on Internet sales. 

Second, states are adopting laws redefining “nexus.” In 2008, New York was the first state to enact an innovative law that relies on the fact that many out-of-state retailers enlist independent in-state websites known as affiliates to promote sales. At least 210 of the 250 largest Internet retailers operate affiliate programs. Affiliates place links on their websites to the retailer’s site and receive a commission when someone follows the link and buys something from the retailer. It has long been established that states can require out-of-state sellers to collect sales taxes if they use independent representatives paid on commission to solicit business within the state. New York’s new law effectively deems a retailer to have a physical presence, or nexus, within the state when it has independent affiliate websites promoting sales on its behalf within the state.

Legislators in at least seven other states introduced similar bills last year. Similar bills passed in North Carolina and Rhode Island, but California’s, Hawaii’s, Connecticut’s and Minnesota’s bills were vetoed by their governors. Additionally, states such as Arizona, Florida, Maryland, Mississippi, New Mexico, Tennessee, Texas, Vermont, Virginia and Wisconsin have either introduced or are considering legislation.

Illinois is the most recent state to pass an Internet tax law (H.B. 3659). The bill, which passed the General Assembly in early January, is awaiting Governor Pat Quinn’s approval and would become effective in July. In a sense, however, this tax is not new. The Illinois General Assembly passed the Use Tax Act in 1995, requiring a purchaser to pay taxes on items bought for use in Illinois since. In fact, Illinois recently implemented an amnesty program to allow customers to pay sales and use taxes on past online purchases, between June 30, 2004 and December 31, 2010, without penalty. Under the amnesty program, which lasts until October 15, consumers can pay this tax as part of their Illinois Form IL-1040 income tax.

This amnesty program and the new legislation will create new revenues to help decrease Illinois’ budget deficit, however, as Internet sales continue to grow and this revenue increases the extra revenue could be used to fund new and innovative programming in Illinois.

Ji Won Kim contributed to this blog post.


Illinois General Assembly Approves Temporary Revenue Increase

In the waning hours of the lame duck legislative session, the Illinois General Assembly approved a temporary increase in the state income tax along with a series of spending restrictions designed to ensure that the new revenues go towards paying down the state’s massive debt and bringing financial stability to our state. The passage of this revenue package is the culmination of the efforts of the Responsible Budget Coalition, an unprecedented coalition of anti-poverty, human services, education, labor, good government, seniors and faith-based advocates.     

Under the legislation, S.B. 2505 amdt. 3, the individual income tax will increase from 3 to 5 percent for the tax years 2011-2014, revert to 4 percent for the next ten years, and then go to 3.5 percent thereafter. The corporate income tax will increase from its current level of 4.8 percent to 7 percent for the tax years 2011-2014, revert to 5.6 percent for the next ten years, and then go back to 4.8 percent thereafter. 

It is estimated that increasing the individual income tax from 3 to 5 percent will yield over $6 billion in revenue. Increasing the corporate income tax to 7 percent will yield another $1 billion.

The legislation includes a number of spending restrictions designed to ensure that the new revenues go towards paying down the state’s debt and addressing the structural imbalance that has resulted from state revenues failing to keep pace with needed expenditures. These spending restrictions are:

  • A hard cap on spending for the next four years. The cap will be $36.8 billion in year one (FY12), or 10 percent more than FY11 estimated spending of $33.5 billion, and will then increase by 2 percent each year for the following three years. The reason that the first year cap in 2012 is higher is so that it can include all of the spending lines from 2011 that the state simply did not pay--the pension payment, bills to providers, making up for the loss of federal  stimulus funds, debt services, and more. Once that “base” is set, then limits for the three following years are very tight.
  • The hard cap encompasses all state spending, including general funds, continuing appropriations (pensions), and general funds transfers.
  • Within 60 days after the General Assembly passes a law authorizing state spending from state general funds (e.g., the state budget), the Illinois Auditor-General will have 60 days to review the legislation and determine whether the spending in the bill exceeds the hard cap. If he determines that it does, then the General Assembly has 45 days to reduce spending below the cap or, failing that, the Governor then has 15 days to do so. If spending is not reduced below the cap, then the individual income tax rates revert to the existing rates of 3 percent for individuals and 4.8 percent for corporations.
  • The spending cap can be exceeded only if the Governor declares an emergency and neither the Comptroller nor the Treasurer notifies the General Assembly that they do not concur with the Governor that there is an emergency.
  • Statutorily mandated spending of any kind may be reduced by the Governor if he determines that doing so is necessary to remain within the annual spending cap.

The cumulative effect of these spending restrictions will require further assessment, so stay tuned for a future blog on that topic. Nevertheless, the magnitude of the spending cuts that would have been required had the revenue package not been approved are unimaginable and would have imposed grave hardship on millions of Illinoisans and consigned our state to a very bleak future. Illinois would also have begun defaulting on loan payments and missing payrolls, becoming a financial pariah.

The revenue package also provides that in 2015, after the spending restrictions expire and the individual income tax reverts to 4 percent, a defined amount of funds will be set aside for education, and the same amount will be set aside for human services. The education and human services set-asides will be 3.1 percent of increased revenues from 2015-2024 and 3.6 percent thereafter.

The revenue package approved by the General Assembly is also noteworthy for what it did not include. Despite the fact that Illinois’ individual income tax is highly regressive, with all taxpayers subject to the same 3 percent rate, the final package did not include any provision to lighten the burden on the working poor, such as an expansion of the state’s earned income tax credit. On the positive side, while the package includes tough restrictions on spending over the next four years, they are temporary and will expire. The General Assembly did not pass a proposed constitutional amendment that would have permanently locked in spending at levels that would have eventually led to drastic cuts in services.

In closing, nothing threatens a politician’s career more than voting to raise taxes, especially an increase of this magnitude. In the end, the members of the General Assembly who voted in favor of the revenue package, and its leadership, must be lauded for their courage in doing the only responsible thing they could do to restore financial stability to the State of Illinois and ensure that it lives up to its obligations and does not forsake its children, its teachers, its mentally ill and developmentally disabled, and all of its other most vulnerable residents. The Senate vote is available here, and the House vote is available here. Be sure to thank those who voted yes and rally to their defense if they are attacked for their vote.


President Obama's Tax Cut Deal: The Right Deal for the Unemployed and Working Poor

It has become fashionable to attack President Obama for a perceived lack of leadership and resolve. These attacks have come from all directions. Undoubtedly the tax cut compromise brokered by the President will give new fodder to his implacable critics on the Right and the Left. The bottom line, however, is that President Obama succeeded in negotiating the best possible deal out there for the unemployed and those in working poverty, while adhering to his principles and deferring until the next presidential election cycle the debate between cutting taxes for the rich and reducing the deficit. 

First, here is the financial situation that the President faced:

  1. The program extending unemployment insurance benefits beyond 26 weeks for up to 99 weeks had expired on November 1. Two million people were going to lose their unemployment benefits by Christmas if no agreement was reached.
  2. The progressive tax cuts enacted under the President – expanding the earned income tax credit and the child tax credit, growing the college tuition tax credit, and the middle class make work pay tax cut – would have expired on January 1, and the average American’s taxes would have gone up $3,000.

Of course, the Right was faced with expiration of the tax cuts on the wealthiest 2% of Americans and reinstitution of the Estate Tax. Who was in a better position to hold out?

Second, here is the political situation that the President faced:

  1. A new, very conservative Republican majority takes control of the U.S. House of Representatives in January.
  2. Senate Republicans recently announced that they would block consideration of all other matters in the Senate until the tax cut extension issue was resolved.
  3. Influential liberal Democrats had recently introduced legislation that would have extended unemployment insurance benefits for three months only.

The deal reached by the President:

  1. Extends all Bush tax cuts, including the tax cut for the wealthiest 2%, for two years.
  2. Preserves all of the progressive tax cuts enacted under President Obama (with a temporary reduction in the payroll deduction replacing the make work pay credit).
  3. Makes slight concessions on the estate tax.
  4. Continues eligibility for extended unemployment insurance benefits, which expired on November 1, for another 13 months, with no requirement that the cost be offset with cuts to other domestic programs.

In short, the deal reached by the President ensures that 2 million unemployed Americans will not lose their unemployment insurance benefits during the holiday season, that millions more will not lose their benefits next year, and that all of the progressive tax cuts for the working poor enacted during the Obama Administration will continue. It ends, on the most favorable terms available, a stalemate that is hurting low-income Americans every day it continues. The President got a lot more than other progressives were willing to settle for, while bringing the pain to an end.

The two-year extension of the tax cuts means that the issue of driving up the deficit by continuing tax cuts for the rich will be debated during the next presidential cycle. President Obama made it clear in his statement announcing the tax compromise that he strenuously opposes continuation of tax cuts for the rich. The President reached a political compromise, but there was no compromise on principle.

It’s time to move on.

Want Economic Growth and Jobs? Then Let the Bush Tax Cuts Expire

Tax FormsThis fall Congress will be considering whether to extend the Bush Administration tax cuts for families earning more than $250,000 that are scheduled to expire this year. Proponents of extending these tax cuts for the wealthy argue that allowing the tax cuts to expire will place an enormous strain on the economy and result in higher unemployment.

The non-partisan Congressional Budget Office (CBO) has evaluated this claim and come to the conclusion that it is without merit. To the contrary, extending the Bush tax cuts for the wealthy will do far less to grow the economy and produce jobs than any alternative use of these funds.

Extending the Bush tax cuts would reduce the government’s revenues by approximately $40 billion in 2011. The CBO compared this tax expenditure with ten other potential uses for this money, including such things as extending unemployment insurance benefits, providing a jobs tax credit, or giving fiscal relief to the states. The CBO found that, at the same cost as extending the Bush tax cuts for the wealthy:

  • A temporary jobs tax credit that reduced a firm’s payroll taxes on new hires would generate three times more economic growth and create four to six times more jobs.
  • State fiscal relief would generate three to four times more economic growth and create two to three times more jobs.
  • Extending unemployment insurance benefits, such as the extension approved by Congress last week, would generate five times more economic growth and four to six times more jobs.

Why do all of these alternatives spur so much more economic growth and create so many more jobs than extending the Bush tax cuts for the wealthy? The answer is simple. When the economy is weak, spending is needed to stimulate it. But wealthy people, given an extra dollar in income, are much more likely to save it instead of spending it. This simple principle explains why extending the Bush tax cuts for the wealthy is the worst alternative available if the goal is to stimulate the economy and create jobs.

In the long term, after the current economic crisis has passed, the revenue from allowing the Bush tax cuts for the wealthy to expire should be dedicated to reducing our nation’s unsustainable budget deficit. This would be only fitting since the mammoth loss of revenue resulting from the Bush tax cuts for the wealthy is what created the deficit mess in the first place.

This blog is based on Marr, “Letting High-Income Tax Cuts Expire is Proper Response to Nation’s Short- and Long-Term Challenges,” Center on Budget and Policy Priorities, July 26, 2010.


The Illinois Budget: An Embarrassing and Sad Spectacle

Yesterday, Governor Quinn signed into law the bills that amount to the Illinois state budget for fiscal year 2011. These are the bills the General Assembly sent him, together with roughly half of the money needed to pay for them. The Governor made some alterations and revealed a host of decisions around the funding for agencies and programs. The budget includes cuts of over $240 million for elementary and secondary education, $100 million for higher education, and $312 million for human services. Ninety percent of Illinois general fund spending is aimed at education, health care, human services, and public safety. It follows that those are the vital things being cut, like it or not.

Governor Quinn and his Administration made it clear that they are not happy with these cuts, necessitated by the failure of the General Assembly to produce sufficient revenue to responsibly fund the government. The Governor himself has repeatedly explained the need for and expressed support for the significant new revenues needed to sustain Illinois financially. He has been criticized for failing to engineer support for those revenues from the General Assembly, but he at least was clear about the need and his own position. 

Interest groups, representatives of needy populations, and others will be making specific points about the decisions and priorities in the Governor’s actions to implement this budget. Those are important debates and worth close attention. Yet they have the feel of a desperate squabble over scraps. 

Most of the cuts in this budget are harmful and unwise. They are not driven by policy considerations or evidence-based program evaluations, but by the brutal calculus of the state’s fiscal default. These are the kinds of sorry, no-win decisions that must be made when the Legislature hands the Governor a budget with a shortfall that is HALF of the needed money. The truth is that the budget does not contain the resources to ensure that the items not being cut will in fact be paid for. Some will, some will not. All will have to wait far too long. 

The bigger picture here is that the crisis cries out for responsible leadership and a comprehensive solution that includes adequate new revenues. An election season is not the time to hide from responsibility, take shelter behind a self-justifying poll (“my poll says my constituents do not want to pay higher taxes”), or blithely assert with no specifics that there is a magic way the crisis can be solved without new revenues. It is the time to tell the truth, to teach the constituency what is needed to solve a historic crisis, and then to lead the effort to win it. Illinois voters are capable of adult decisions--nobody wants to pay higher taxes, but most will understand the need. A comprehensive solution is one that puts in place the revenue infrastructure to navigate through the crisis over at least two years. A comprehensive solution will include pain--we have that part already--but it must also avoid making unwise and harmful cuts to essential services. And it must have adequate new revenues to back up strategic borrowing that is also needed to get through the crisis.

For now, we have the embarrassing and sad spectacle of the distribution of scraps and the dismantling of important policies and programs by default. Illinois needs a responsible budget that stops cutting vital programs, meets the state’s needs, keeps the state’s promises, and pays the state’s bills.   

Filibuster Blocks Recession Relief, Further Complicates State Budget

A Republican filibuster has prevented the Senate from voting on its version of jobs legislation. The cloture motion (to end the filibuster) got 57 votes last week, but it needed 60 to pass. A clear minority of the Senate has, at least for now, successfully said “no” to recession relief for jobless people and budget relief for states. As a result:

Eighty-thousand unemployed workers in Illinois won’t receive unemployment insurance (UI) benefits. They will not be spending those benefits, as they always do, in stores and businesses close to home. Thus there will be no boost for the local economy or help for local businesses to avoid layoffs. More than 2 million people nationwide will lose these benefits if Congress fails to act before leaving for the July 4 recess.

Illinois won’t receive $545 million in desperately needed federal assistance in the coming year, which had been assumed as part of the revenue available to the state in the recently passed budget. This creates the immediate threat of even deeper spending cuts than we’ve already endured. Those cuts also cause private- and public-sector job losses and raise the risk of a double-dip recession as the loss of spending power ripples through the economy. Without more federal aid, state budget-cutting actions nationwide could cost the economy 900,000 jobs in the public and private sectors next year.

Illinois will have to end prematurely its Put Illinois to Work program. This is funded by the TANF Emergency Fund, which would have been extended by the bill the Senate could not vote on. It has already created 22,000 jobs in Illinois through September 2010 and would have created more had it been extended.

Congress should not leave for the July 4 holiday until it extends unemployment benefits, provides additional funding to states, and extends TANF funding for emergency jobs programs. 

What Happened in Springfield Last Week??
A State Budget, Sort of

The General Assembly stands adjourned, for now, as legislators took the half-baked state budget pie out of the oven before it could finish cooking so they could rush off to appear at the Memorial Day weekend parades. 

Heading the list of unfinished business is the failure to provide for paying off the state’s $3.7 billion fiscal year 2011 pension obligation. The Governor had sought authority to borrow these funds, as Illinois did last year, but the General Assembly declined his request. 

Since borrowing authorization requires a 3/5 majority, at least one Republican vote was needed in the House. Two retiring Republicans voted in favor and one Democrat voted against, so the pension borrowing measure cleared the House by the narrowest of margins. In the Senate, however, where no Republican votes were needed (and none were forthcoming), two Democrats blocked approval of the pension borrowing authority on the grounds that it would simply aggravate our fiscal problems without being part of a plan, including a revenue increase, to actually solve our fiscal mess.

So where does the General Assembly’s decision not to approve borrowing authority to cover the FY11 pension obligation leave us? The budget approved by the General Assembly assumes that $6 billion in outstanding bills will be unpaid at the end of FY11. If FY11’s pension payment cannot be borrowed, then another $3.7 billion must be added to the $6 billion in unpaid bills that the budget is predicated on, making the grant total of unpaid bills at the end of FY11 $9.7 billion. Or, the pension funds could cannibalize themselves, selling off investments to meet current obligations and thus dramatically lowering future investment income. Given these unpalatable options, the Senate’s leadership may continue trying to find the one vote needed to approve borrowing $3.7 billion to cover the FY11 pension payment.

The fiscal year 2011 budget passed by the General Assembly (H.B. 859) resembles last year’s. Rather than making line-by-line appropriations as in the past, and as the Governor had proposed, the General Assembly continued last year’s practice of providing lump-sums to the agencies and leaving it to the Governor to decide which programs to fund and which programs to cut. The overall amount appropriated for grants remained about the same as last year but the appropriation for state operations was cut by 5 percent. The Governor was again given $3.2 billion in unallocated funds to spread around as he sees fit. Different state agencies fared differently – the Illinois Department of Human Services, for example, was appropriated only $2.5 billion, $1.5 billion less than its current appropriation of $4 billion, although the Governor can use the $3.2 billion in unallocated funds to cover some or all of this gap.

The General Assembly also passed an Emergency Budget Act, which gives the Governor sweeping powers to make cuts without legislative review (S.B. 3660, House Amdt. 9). It allows him to put more than $2 billion into a contingency reserve that could not be spent by the agencies. It also makes all state programs, whether authorized or required by state law, “subject to appropriation,” i.e., not operational unless supported by an appropriation that is not otherwise obligated or reserved. These emergency powers expire on January 9, 2011, at the end of Governor Quinn’s term.

While abdicating responsibility for making unpopular budget cuts, the General Assembly again avoided consideration of the only viable alternative for solving our budget mess – raising revenue, as the Responsible Budget Coalition has advocated, along the lines of House Bill 174, which would increase the individual income tax rate from 3 to 5 percent and broaden the sales tax base to include services, raising approximately $6 billion in annual revenues. The General Assembly also chose not to capture $320 million in annual revenue from a proposed cigarette tax increase. The General Assembly did approve a tax amnesty plan whereby tax cheats can pay off their debts without penalty, which is estimated to raise $250 million (S.B. 377, H. Amdt. 3). The legislators threw $50 million of this back by approving a “sales tax holiday” for back-to-school purchases in August.

The budget also relies on various one-time revenue sources, including $1.2 billion obtained by borrowing against the proceeds from the remaining 17 years of a tobacco settlement fund.

As the Illinois General Assembly was wrapping up last week, word came that the U.S. House of Representatives had stripped the enhanced Federal Medical Assistance Percentage (FMAP) six-month extension from the unemployment insurance extension package, considered the best vehicle for its enactment. Unless restored by the Senate and agreed to by the House-Senate conferees, or included in a different legislative package, this continuation of ARRA federal fiscal relief to the states will come to an end, blowing another $700 million hole in the FY11 state budget.

In sum, regardless of whether borrowing to pay this year’s pension tab is approved, the state will continue to lack the revenues to pay its bills. By the time this fiscal year comes to a close at the end of June, Illinois will have racked up $6 billion in unpaid bills. The budget proposed by the Governor and approved by the General Assembly assumes there will still be $6 billion in unpaid bills at the end of the next fiscal year in June 2011. Nobody believes that this number will not grow. While the Governor will make some visible cuts to programs, far more insidious and lethal will be the state’s continuing and expanding practice of not paying its bills. State-funded providers of services to young children, the elderly and disabled, the homebound, the developmentally disabled, the mentally ill, those addicted to alcohol and controlled substances and so on will not have the plug pulled on them all at once. Rather, they will die a slow and agonizing death as month by month the state’s payment for services rendered does not arrive and, one by one, they are forced to give up the ghost.   

List of Enacted State Budget-Related Legislation:

General Assembly Takes Step Towards Responsible Budget

The General Assembly recessed on their planned adjournment date of May 7, having failed to enact a state budget for fiscal year 2011. May 7 was an artificial deadline. The real deadline is May 31, after which bills may not take effect before January 1, 2011 unless they pass by a 3/5 majority, which would require there to be Republican votes  to pass a budget bill. May 7 may have served a useful purpose for Senate President Cullerton and House Speaker Madigan, however, since it allowed them to determine exactly where the fault lines lie and determine what they must do to get a budget enacted before the May 31 deadline.

The failure of the General Assembly to agree on a budget is a temporary victory for the Responsible Budget Coalition since the only budgets that were on the table on May 7 were fiscally irresponsible and would have inflicted severe pain on our most vulnerable state residents. The House resoundingly rejected both proposed budgets – one that would have required massive cuts in services and the other that would have resulted in massive borrowing. Speaker Madigan did not allow a vote on the other option – raising revenue.   

In the waning days of the session before the May 7 recess, the General Assembly also gave serious consideration to enacting an Emergency Budget Act. The proponents apparently believed that putting all responsibility for budget cuts on the Governor would allow them to escape detection when the residents of Illinois dust for fingerprints on the elimination of services to the mentally ill, developmentally disabled, homebound elderly, infants and toddlers, and so on. The Emergency Budget Act would allow the Governor to implement emergency rules to cut programs, make all state programs “subject to appropriation” and thus optional instead of mandatory, and establish contingency reserves that could be used to eliminate budgeted state programs. In short, the Emergency Budget Act would give the Governor unilateral power to cut spending and eliminate programs as he sees fit, without legislative review.

Governor Quinn would exercise these extraordinary powers for the first six months of the fiscal year that begins on July 1. If Quinn were to lose the November election – and all the polls show him trailing -- then the power to eliminate any and all state programs would fall into the hands of Senator Bill Brady for six months until the emergency powers expire on July 1, 2011.  Brady has proposed cutting taxes by $1 billion in the face of Illinois’ $13 billion revenue shortfall, a position so extreme that it’s not even embraced by the radical free market Illinois Policy Institute.

So how do you close a $13 billion budget shortfall?  Here’s what the General Assembly was considering:

$0.6 billion (4%) New Revenue
$0.3 billion (2%) Spending Cuts
$1.2 billion (9%) Spend all of 17-year proceeds from tobacco settlement this year
$0.6 billion (4%) Other
$4.7 billion (35%) Borrow
$6.0 billion (45%) Unpaid Bills
$13.4 billion Total

That's right--$4 out of every $5 used to "balance" the state budget would be either borrowed or obtained by not paying our bills.

Last week's action shows that the messages of the Responsible Budget Coalition are penetrating. There is growing momentum to find a real solution to our fiscal crisis and not simply to postpone the problem and, in the meantime, make it worse. Slowly the conventional wisdom that revenue increases are not possible during an election year is being whittled away. The game is far from over though and advocates for a responsible budget that raises the revenue needed to begin to dig us out of our deficit hole still face an uphill climb. Nor is there any sign that the leadership of the General Assembly is willing to seriously entertain a proposal to significantly increase state revenues. In the meantime, there will also be great pressure on the budget holdouts to end their resistance to the enactment of a bad budget. It's still all hands on deck for a responsible budget.

State Budget Cuts and Advocacy

Responsible Budget Coalition Rally in SpringfieldThe Los Angeles Times recently posted an oddly inviting “state budget balancer" that allows you to have a go at balancing California’s $26 billion budget deficit by clicking on services to cut or items to tax. The “deficit meter” keeps track of how well you’ve done at solving the state’s massive budget shortfall at each click. Other states and cities have these online budget balancing tools as well—for example, in New Jersey, there’s the “You Be the Governor” challenge; for a crack at the federal deficit, see the American Public Media’s flashy “Budget Hero”.

Of course, the consequences of states’ fiscal distress are more complex and varied than these simplistic tools reflect. Among the consequences is an increase in demand for help from legal aid programs when people lose access to vital services (such as those available for “cutting” in the “deficit meter”).

Budget-related advocacy is underway across the country to help those affected by fiscal cuts. For example, the California Budget Project has reported on “Assessing the Impact: How Proposed State Budget Cuts Would Affect Women in California and What You Can Do to Help.” In Illinois, the Responsible Budget Coalition has an ongoing campaign to “Save Our State”; the Shriver Center is an active member of the coalition. And, in the District of Columbia, the Legal Aid Society is urging an equitable approach to the District's fiscal crisis.

What can legal aid do about state budget cutbacks? This is one of the article topics suggested by a participant in an April 20th conference call sponsored by Clearinghouse Review: Journal of Poverty Law and Policy, a publication of the Shriver Center. Fifteen attorneys from eleven states offered ideas ranging from health care reform to obligor defenses in child support enforcement to medical-legal partnerships.

Which of these topics would you most like to see covered in an upcoming issue of Clearinghouse Review? Vote now in a new two-question survey. Or post your additional suggestions on the Shriver Center’s Facebook discussion page—we value your input!

15,000 Rally to Demand a Responsible State Budget

“Act like leaders, not like fools,

Save our services, save our schools!”

So chanted 15,000 people gathered in front of the State Capitol on Wednesday, in the largest Springfield rally ever. The  demonstrators demanded that the General Assembly not return to their home districts on May 7 as scheduled, or at any other time, until they have enacted a responsible budget that raises the revenue needed to avoid the human catastrophe facing  Illinois in the form of draconian state budget cuts.

Reasonable minds do not disagree: a substantial increase in the state’s revenues is an indispensable piece of the fiscal puzzle if our state is to avoid financial collapse. Earlier this year, the Civic Federation, the voice of Chicago’s business community for over 100 years, released its report on the state’s fiscal crisis and called for an $8 billion tax increase, saying:

We do not enjoy advocating a significant tax increase in the middle of a difficult recession. However, continuing to do nothing would be by far a worse option.   

In jeopardy unless there is a revenue increase are programs that provide vital services to people in need – seniors, the disabled, low-income single parents, people with drug addictions or suffering from mental illness, children at risk of academic failure, adults with developmental disabilities. These same programs provide jobs for teachers, home health care workers, substance abuse and mental health counselors, child care workers, persons who work with adults with developmental disabilities, and others. 

Those who say that raising taxes will cost Illinois jobs are wrong.  The truth is that our continuing failure to raise the revenue needed to pay our bills will result in a devastating loss of the jobs described above as well as those of police, firefighters, and others. 

And let’s consider the private sector. The belief that businesses make decisions on where to locate based solely on tax rates is demonstrably wrong. Does anyone really believe that a crumbling infrastructure and an educational system in shambles create a favorable business climate?

Those who say we over-spend and over-tax have their facts wrong. The facts are that Illinois’ three percent state income tax rate is the lowest of all 41 states that have a state income tax, and Illinois is 43rd in the country in general funds spending as a percent of the state’s gross domestic product.

Nobody likes to pay higher taxes. Nothing is politically easier than to say, “I didn’t raise your taxes.” But we cannot afford to remain on the path of expediency.

Franklin Delano Roosevelt said: “Taxes are the dues that we pay for the privileges of membership in an organized society.”

Oliver Wendell Holmes put it even more succinctly: “Taxes buy civilization.”

We’re not going to climb out of our $13 billion hole in one year, but we can’t wait to start.

“Show some guts,

Stop the cuts!”

The Census: Want to Lose $100 Million?

Filling out Census formThe Census Bureau’s new TV ads say: “10 Questions, 10 Minutes, 10 Years.” All it really needs to say is $100 million. That’s how much it was estimated that Cook County lost in Federal funding over the 2002-2012 period due to undercounting in the Census. Illinois as a whole lost $193 million due to undercounting. That is because the data from the Census is the basis for the nationwide distribution of $400 billion in federal money for a multitude of programs. If state populations aren’t counted correctly, money can’t be distributed correctly.

While $200 million won’t solve the $11 billion state budget gap, at this point Illinois can use all the extra help it can get. And to get it, all the government wants from you is ten minutes of your time. Ten minutes to fill the out Census, and send it in. That’s it. That’s a lot of money for such a short time.

Data from the Census is also used to determine the allocation of Congressional seats, the development of public policy, and to ensure that districts are fairly drawn within states. It determines how many schools, hospitals, teachers, firemen and police we need. If you want more of a political say, complete the Census form. By filling out the Census, we increase our chances of having all the programs and services people count on. 

It won’t cover all of Illinois’ costs, but its $200 million we don’t have otherwise. Make sure Illinois and your community gets all that they deserve. Fill out the Census and send it in.  It’s worth at least $200 million.

Illinois Governor Proposes Big Cuts to Services for Some of the State's Most Vulnerable

Gov. Quinn made a grim budget request today. His proposed budget includes $2.2 billion in spending cuts and again relies heavily on borrowing ($4.7 million) and not paying the state's bills ($6.3 billion).  $1.3 billion of the spending cuts would be in the area of education with a 17 percent across-the-board cut.

As an alternative to cutting education spending by $1.3 billion—unimaginable in an election year—Gov. Quinn proposed increasing the individual income tax rate by one percent of income, from three to four percent. The $3 billion in proceeds from this increase would all go to education—$1.3 billion to eliminate the proposed cut and $1.7 billion to pay back bills.

Gov. Quinn has not proposed any means to avoid the $900 million in spending cuts he proposes to non-education programs. 

Equally disappointing, Gov. Quinn's proposed budget includes no long-term plan for eliminating the state's $13 billion revenue shortfall and getting out of our fiscal mess. Rather, it appears to be a "take what you think you can get" budget built on diminished expectations of what can be accomplished in an election year.

All of which means big cuts in services to some of our most vulnerable populations. For example, mental health services will be cut by over $50 million. The Illinois Department of Human Services estimates that as a result, 70,000 people, including 4,200 children, will lose their mental health services; 4,000 mentally ill people will have to leave their state-subsidized housing; 3,800 mental health jobs will be lost; as many as 87 mental health agencies may close; and persons not eligible for Medicaid, such as the formerly incarcerated, will be unable to access mental health services.

The Governor's proposed budget now goes to the General Assembly. 

Rx for Illinois Budget: Responsibility, Not Ideology

There is something almost purely ideological about opposition to the revenue reforms that knowledgeable analysts agree Illinois needs right now – not only to escape its fiscal crisis but to make its tax system more fair and sustainable.

I suppose ideological biases are fair enough among some anti-government zealots and politicians who hope to use them and lead them.  But somehow one would hope for a more balanced and dispassionate approach from mainstream media, such as the Chicago Tribune.

It can only be ideology that justifies the anti-tax position by reference to taxpayers “already devastated by the recession.”  In fact, under leading revenue-reform plans, many lower- and moderate-income households would pay no increased income tax or a modest increase; the lowest-income households would pay less. 

But for those who’d pay a few dollars more per paycheck in income tax – is that more weighty than maintaining state-assisted care for their elderly relatives, safe roads and bridges, schools with a full complement of teachers and educational programs, or the public health programs that protect us from epidemics?

This crisis demands a balanced approach that includes significant new revenues raised in a fair way. Polling and history show that, while nobody likes to pay higher taxes, people appreciate honest leadership in a crisis and understand and support a balanced approach.  We already are suffering from severe cuts; we are already borrowing; we will continue to seek as much help as possible from the federal government. But those measures are not enough. We need significant, new revenue to complete the balance and navigate out of the crisis with a sounder future in store.

President's Budget Proposal: A Strong Tightrope Walk

Earlier this week President Obama announced his budget proposal for the coming year. These are precarious times with conflicting demands. Most economists agree that more government spending is needed to help speed the end of the recession and bring down unemployment. But there is also mounting concern that that federal deficit is getting too large, which weighs against added longer term spending. The President’s proposal walks the tightrope between these concerns and promotes both the short term “jobs” goal and the longer term deficit-reduction goal.  It contains important policy and spending priorities and deserves support.

Help for states and working families

The President proposes to extend the life of crucial enhanced payments to states under Medicaid, the state fiscal stabilization program, and the TANF Emergency Contingency funds. These three funding streams created by the American Recovery and Reinvestment Act (ARRA) stimulus law have helped states patch their budgets, save and create jobs, and protect health coverage. It is important that as much of this relief as possible be included in the immediate “jobs” proposal (some call it a “second stimulus”) being debated for passage in Congress in the next weeks, rather than waiting for the next federal fiscal year.

Improve revenues overall while protecting middle-class tax relief

The budget proposal allows the Bush-era tax credits for the wealthy to expire as scheduled, and it closes a number of tax loopholes. It also makes permanent the improved middle-class tax relief that was put in place by ARRA through the Earned Income Tax Credit, Child Tax Credit, and the American Opportunity Tax Credit.

Targeted discretionary spending freeze, but program increases

The discretionary spending freeze got the most press. It is a “global” freeze, in that the overall number is frozen, but within that number there are important priorities. Some programs actually get increases, while less effective programs will be cut. Child care would get a $1.6 billion per year increase. Housing Choice vouchers (Section 8) would get a $1.3 billion increase, enough to fully fund renewal of all 2.1 million current vouchers. Pell Grants would increase by over $7 billion and would be taken out of the “discretionary” category altogether.  And Head Start would increase by $1 billion.

Assumes passage of health reform

By making financial decisions that assume that health reform measures are in place, the budget proposal corroborates the frequent statements of the President and others that the Administration intends to complete the health care reform process.

The budget proposal walks the difficult line between short-term stimulus and long-term deficit reduction, while setting important priorities for low- and middle-income working families. 

Medicaid Plays a Critical Role in Illinois's Economy: A New Report by the Center for Tax and Budget Accountability

Medicaid is a vital safety net for Illinois residents who cannot afford increasingly expensive private health insurance and fills the gap in employer-provided insurance for the growing ranks of the unemployed and their families. But a recent report by Heather O’Donnell, of the Center for Tax and Budget Accountability (CTBA), Medicaid Plays a Critical Role in Illinois’ Economy, reveals the tremendous additional impact that Medicaid dollars have in bolstering our economy. The report shows that Medicaid not only provided health care coverage to 2.6 million Illinoisans (over half of whom were children) in 2008, it also supported “wages, employment, business income, consumer spending, state tax revenue, and overall economic output.”

The Medicaid program is financed by both the state and federal government. In fiscal year 2008, 53% of the total funding for Medicaid came from the federal government. Under the federal American Recovery and Reinvestment Act (ARRA), states receive increased federal funding through December 2010 to help during the recession. The CTBA report explains that, with this enhanced federal share, if Illinois cuts Medicaid spending by $10 million, it will actually lose $16.2 million in federal matching funds.  

But that would only be the beginning of the impact of such a cut. Medicaid spending reimburses health care providers, and then providers pay employees’ wages. The employees then purchase goods and services in the local economy. According to the CTBA report, Illinois’s 2009 state and federal Medicaid spending resulted in approximately $46 billion in additional business activity and supported about 385,742 jobs. This would mean that a cut of just $10 million in state Medicaid spending would result in an estimated loss of more than $80.4 million in business activity and $27.6 million in lost wages across Illinois.  

This positive ripple effect of Medicaid spending means cuts to Medicaid programs would hurt the Illinois economy, increase unemployment, and prolong the recession. Cuts to Medicaid would not only deprive people of health coverage and health care, but also exacerbate the financial strain felt by businesses and workers and cause Illinois’ economy to further deteriorate. 


Making Sense of the Illinois State Budget

When newly-installed Governor Quinn gave his budget address March 18, 2009, he put forth the case for a combination of budget cuts and tax increases necessary for the indebted state of Illinois to get through this devastating recession. Although he pushed this message throughout the legislative session and the Senate approved a substantial tax hike, in the end the budget signed into law on July 15 relies instead on borrowing and harsh cuts to essential services in Illinois.

In a year of many notorious firsts within Illinois politics, this year’s budget is unprecedented in many ways. It relies tremendously on borrowing, jeopardizing the state’s credit-worthiness and resulting in a massive projected deficit of $10 billion for next year. It grants the Governor unheard of discretion by appropriating lump sum amounts to agencies under his control and leaving up to him the decision as to which programs to cut, rather than providing line-by-line programmatic spending authority as in past years, in an attempt to push the blame for the required cuts onto him. To the devastation of the state’s most vulnerable, it makes deep cuts in many programs on which thousands of residents rely.


The full impact of this year’s budget will not be realized until the Governor and his agencies make the tough decisions the legislature chose not to make, deciding which programs will be fully funded, which will be cut, and which will be eliminated. But the ultimate impact of this budget will continue to be felt for years, as the state will cope with addictions that could have been treated, violence and homelessness that could have been prevented, and increased expenses from seniors forced into nursing homes.


Before this budget was even signed into law, the uncertainty caused by the failure to adopt a new budget before the start of the state’s fiscal year and the massive cuts being proposed led to hundreds of social service providers being laid off and thousands of Illinois residents in need of assistance being turned away. Since the adopted budget funds social services at about 85% of the Governor’s requested budget, which already contained cuts, more layoffs will occur and additional services will be cut. But the fight is not yet over. With continued advocacy by the thousands who have written letters, called legislators, attended rallies, and struggled to make their voices heard, the legislature will return in January to renewed cries for the tax increase the state so desperately needs. Perhaps then, when the cuts are real and the legislators see the suffering their cowardice created, they will step up and meet the needs of the people and state they supposedly serve.


To read the Shriver Center's complete analysis of  the Illinois State budget, click here.  

The incalculable cost of the General Assembly's budget

The Illinois General Assembly meets this week to attempt to resolve the budget.  Failure carries with it incalculable costs that prolong the recession and hit every legislative district. 

The impending cuts directly impact hundreds of thousands of children, seniors, people who are sick and hurt, the unemployed, and workers.  The costs to them are staggering, but there are other costs:

  • The state will get sued repeatedly.  Some of the cuts would violate federal or state laws.  Some would violate existing court orders and consent decrees.  The Attorney General’s office must defend all these cases, but it has its own shrunken budget and would be swamped.
  •  Proposed cuts violate the condition in the federal stimulus law that states not cut Medicaid.  This will cost us billions in federal stimulus funds.    
  • The state would also lose massive sums of federal matching funds and block grant dollars across a range of programs.
  • These lost federal funds come out of the Illinois economy – it is money not spent on goods and services in our state.
  • The Department of Human Services estimates that the cuts to its budget would cause a loss of 170,000 jobs outside of state government.  These are entrepreneurs, independent caregivers, and employees of non-profit or for-profit businesses that provide or support the programs in various ways.
  • Legislators have spent their careers building important programs that will be gutted or eliminated by this process.  Time, talent, and hard-won accomplishment would be wasted. 

The General Assembly’s budget would prolong the recession and hurt the state, not just those who need the programs.  We need to fund the government and not bring about all of the above incalculable costs.