There is a certain “conventional wisdom” gripping Illinois, shared by our Governor, most legislators, and the vast majority of news media voices, including certain columnists at this paper. According to this narrative, our budget and pension systems are unsustainable due to years of state “overspending” or “living beyond our means.” Now, due to our horribly underfunded public pension systems, our state government has “no choice” but to cut or eliminate pensions and benefits for retirees, dramatically cut state spending, or do some combination of both.
Neither the premise nor the conclusion are correct. Austerity budgets and attacks on public pensions are not necessary.
The fundamental cause of our state’s financial woes has nothing to do with exorbitant spending, exorbitant pensions or “big government.” Illinois has the smallest number of state employees per capita in the United States, at 4.1 per 1,000 residents. And while the occasional abusers of our public pension systems make headlines, the media rarely tells the other part of the story: Illinois ranks in the bottom one-fifth of all states for retirement benefits paid to its state workers.
The root cause of the problem is that we have one of the most regressive – and stupidest -- tax systems in the United States. When all taxes in Illinois are measured for their combined impact on different income groups, we find that the bottom 20 percent of income earners are taxed at a rate of 13.8 percent, the next highest 20 percent are taxed at a rate of 12.1 percent, and so on up the scale, with the top 1 percent paying just 4.9 percent of their income in taxes. Illinois taxes poverty much more than wealth. That’s why we have a structural deficit – the system cannot possibly generate enough revenue to meet societal needs. Yet legislators have ignored the problem for decades, and instead borrowed from the pension systems to make ends meet.
That, in turn, is the fundamental cause of our current pension crisis -- and the debt service on past borrowing is now eating into our operating budget. Yet most of our so-called political leaders still refuse to address the cause of the problem, proposing instead to place all of the burden on public employees, retirees, students, educators, and the rest of us who desire, or depend upon, a state government capable of serving its core functions.
There are solutions. The single most potent one is found in H.B. 106, the Financial Transactions Tax Act, introduced by State Rep. Mary Flowers. It has also been described as the “LaSalle Street Tax,” named after the Chicago street where large-scale financial trading occurs.
Illinois operates two of the largest financial markets in the world -- the Chicago Mercantile Exchange and the Chicago Board Options Exchange. Each year, the value of products traded on these two exchanges totals more than $800 trillion. By comparison, total world gross domestic product is about $65 trillion. H.B. 106 would require buyers and sellers to pay a $1/contract fee on all agricultural futures and futures options traded on these two exchanges and a $2/contract fee on all other trades. Average contract size at these exchanges is more than $225,000, so the tax amounts to less than 0.001 of 1 percent of average contract value. Yet, given the volume of trading on these two exchanges, the tax would generate an estimated $10 billion to $12 billion in revenue annually, roughly one-third the value of our state’s current operating budget. That would be enough to avoid the current projected cutbacks and start paying down the pension deficit.
Some critics dismiss this proposal by arguing that if such a tax were enacted, the exchanges would simply move or the traders would start trading on other exchanges. But neither criticism comports with reality. Financial transactions taxes, most of them much larger than the tax proposed in H.B. 106, have been implemented in more than 25 countries without causing any exchanges, or traders, to move. These include the London Stock Exchange, the fourth largest exchange in the world, as well as Hong Kong and South Korea, both among the 10 largest markets by value of trading.
The exchanges would have no economic incentive to move. They do not pay the tax. They simply function as the collection agency for it, no differently than retailers who collect and remit sales taxes paid by consumers. The tax is too tiny to cause traders to trade elsewhere, the products traded on these two exchanges are not traded on any other exchange, and some of the products are exclusively licensed there.
Basic fairness should motivate support for this proposal. All Illinois consumers, even the very poorest, generally pay sales taxes of 7 percent or more for necessities. It is only fair that wealthy speculators in Illinois pay a sales tax of a tiny fraction of a percent to help maintain the system from which they have reaped such largesse. We already tax gambling, sometimes to the detriment of the poor and desperate. It’s time to include the biggest casinos in our state.
Advocates for education, mental health services, child and family services, public health, public transportation, and other essential services can do better than fight one another over slices of a shrinking pie. It’s time to unite and fight back against austerity. House Bill 106 gives us a great starting point. Let’s get behind it -- and take the fight to Springfield. I am willing to present or debate this proposal before any civic group, and can be contacted for that purpose at email@example.com.