TIF Abuse in Chicago

Over the last few years, the amount of money that Chicago has brought into the tax increment financing district has increased to over a half billion dollars this year, TIF districts use current tax revenue to finance economic development that is suppose to later on repay itself through improvement in property values. The money is suppose to be used to increase economic growth and if often used to make pay out to private companies that will then use the money to create new jobs. While this sounds good in theory, in practice it rarely accomplish what it promises to, first of all the money usual ends up going to companies that do not need, companies that can easily raise any capital that they might need in the private investment markets. For the most part any business idea that is a good idea and economically viable will be raise the capital that it needs to get started and to run its operations. For this idea to work the government would have to have a better ability to decide what companies are economic viable than the market place does.
In Chicago you have the add problem that the TIF revenue is off budget so the Mayor Chicago has the ability to do pretty much what ever he wants with it and channel it to the projects he deems best. For example 40 million dollars went to the CME inc, the company that came into existence when the Chicago Mercantile Exchange bought out the Chicago Board of Trade, this merger also result in the company eliminating 400 jobs, so the city ended up paying the company about 100,000 dollars for each job it eliminated, and CME is easily a company that could easily raise all of its capital requirements in the securities market and has zero need for state subsidization.

Reforming Federal Government spending

As I stated in my last post, I intend to talk about ways the the Federal Government could reduce spending, cut taxes and benefit the economy.
End Farm subsidies, as I mentioned in one of my previous post, farm subsidies are bad for the economy and environment, ending the farm subsidy program would save taxpayers around 38 billion dollars a year.

Terminate the International Trade Administration, this department is suppose to promote US Exports, but most evidence indicates that it has little or no effects on the amount of goods and services that the United States exports each year, ending it would save tax payers around 400 million dollars a year.

Terminate the Federal Technology and Industry programs, these program are suppose to subsidize the development of new techonologies by private firms in the economy to make the American Economy more competitive, but in reality they have little effect and the 400 million dollars a year spent on this program is a drop in the bucket compared to the 100 billion spent private investors and organizations on the same thing. These programs sever little practical purpose and should be ended.

Privatize the four Federal Power Market Administrations, these agencies have the job of marketing power from the 120 federally owned power damns, privatizing these agencies would save the taxpayers several billion dollars a year and could raise 10 billion dollars in funds. Sell 3 of them was original proposed by President Clinton in 1996.

Terminate the Community Development Block Grants, these grants were designed to provide help to low income areas, but for the most part these grants are ineffective and produce little in the way of improvement in low income ares. Far more of the money ends up going to wealth neighbor, often funding thing like malls and shopping developments that should be paid for with private funds. End these programs or substantially cutting and reforming them could save the taxpayers up to up 5 billion dollars a year.

Terminate the operation of the Bureau of Reclamations, the job of this agency is to run operations to provide power and water to area in the west. Its operations make little economic sense and the projects that are under taken by it often damage the environment and the subsidization of the water and power that the taxpayers pay for through this agency is helping to cause the water problems in the American West by encouraging more people to move to the area than it can support. This agencies should be privatized and government subsidization ended, this would save the tax payers 1-2billion dollars a year.

Terminate the Bureau of Indian Affairs, this agency is a remnant of by gone age that needs to go, the management of Indians lands should be turned over to the tribes and subsidization should end. Terminating this Bureau would save the taxpayers around 5 billion dollars a year.

In my next post I will continue talking about programs that can be terminated or privatized and other fundlemental government reforms.

The Wrong mindset in Washington

While listening to speech given be a candidate to replace Congressmen Ray Lahood at Saturday morning Tazewell County GOP breakfast it struck my that many Republicans also share the wrong kind of mindset with Democrats, and that mind set is that everything will be ok if can just get more back from Washington D.C., part of the problem with Government right now is that to many members of Congress share this mind set. Instead of trying to find ways to reform Government, reduce it size and make it more efficient, they just want to get more pork for their district. So that when election time comes around again they can say look how much money I have brought back home and use projects to bribe support for interest groups, like business or unions that stand to benefit from pork projects. Each year the Government spends bills on pork projects that produce little in the way of actual benefits for the economy. Instead of Republican candidates talking about how they are going to bring more money back to there districts in the forms of new projects, we need ones talking about how they are going to leave more money in there districts by reducing unneeded government spending and reducing taxes.
In way it is weird that the biggest supporters of tax and spend, or borrow and spend, policies tend to be in political blue states, because these states tend to pay more money into the government than they receive back from it and red state that tend to have fewer supporters of these policies when they receive a disportant about the benefits from government spending. So when it comes to government spending, blue states tend to be net loser and red states net gainers. Over my next few post, I plan to talk about ways to reduce the amount that goverment spends each year.

The Great Farm Subsidy Scam

It’s the time again when the United States government is debating farm policy and agricultural subsidies and once again instead of focusing on bringing an end to the agricultural subsidies and making the farm sector a fair and free market, they are talking about how to reform them. Agricultural subsidies benefit a small portion of the population, the farm sector, and cost the rest of us.

There is a lot of myth out there about farm subsidies and how they affect the public and a lot of them that claim they benefit the public, so lets look at a couple of these myths. The first is that farm subsidies are needed to protect small family farmers, the first problem with this statement is that most farm subsides do not go to small family farms, around 70 percent of all subsides flow to the largest 10 percent of producer. So this means instead of helping the family farms like some proponents of subsides claim, they are really helping larger producers and actually hurt small farms because the value of future subsidies are capitalized into the values of land and other farm inputs, like machinery, raising there prices and making it more costly for small farmers to purchase more land and equipment and difficult for new farmers to enter the market because of the high cost, reducing competition in the long run. Since farm subsides are tied to production and size of the farm, increasing as the amount of output produced by farms increase, farm subsides actually encourage large farms to buy up small farms and land and price small farmers out of the market.

The next myth is that with out farm subsides the price of food in the United State would sky rocket and the general public would be hurt. This is just plain wrong and misconception on the part of many in the public because it ignores that right now there are two prices the public pays for farm goods. The first is the one that most of us know about which is the price we pay at the store, but there is a second hidden price, and that is the price we pay in higher taxes in order to fund the farm subsidies program. If farm subsides were to end, yes the market price would probably rise some but there is no reason that it would rise above true cost that we pay for farm goods, to be exact the cost to the public would probably be less since right now we are paying subsides for far more farm goods that are consumed. The other factor that people ignore is that only select groups of farm products are subsidize and many do not receive any at all, farmers that receive subsides are actually forbidden from growing certain crops, and ending farm subsides would have little effect on the price of these goods. The biggest change is that right now people have no choice on how they spend money that goes to hidden cost of farm products, but with out subsidies they would have a choice since they would be able to decide which items they purchase.

One other point about farm subsides are that are bad for the world economy and they are bad for the environment. They are bad for the world economy because farm subsides in developed countries, the United States far from the worse offender in this case, because they cause farmers in these countries to over produce, in some cases to the put that countries end up giving away some of these products because product is greater than world demand, this over production because of subsidization artificial lowers the prices of these crops in the world markets making it impossible for many farmers in underdeveloped countries to compete in one of the few industries that would have an advantage in and that could be produce an export good that would bring in hard currency, like dollar, euros, yens, ect, that could be used to help fund development in these countries. The over production of farm subsidies also hurts the environment because it leads to the over use of pollutants like fertilizers and pesticides and the over use of farm land with depletes it over time.

It would be better off for everyone in general, excluding of course subsidized farms, if farm subsidies were complete ended and the farm sector returned to a competitive free market. The free market would make farming a more competitive industry; it would create prices that reflect the true market cost and the values of the consumers and it would end the current practice were both the working and middle class are taxed to benefit large corporations.

Parecon

It been a while since I have posted, but for my first post back I am going to do something a little different and talk about a purely economics issues, instead of political or political economy one. I am going to talk about a relatively new form of left wing economics, which has in particular shown up in the Green Party, Participatory economics(Parecon). The information that I am going to be using for this comes mainly from the wikipedia entry on participatory economics, http://en.wikipedia.org/wiki/Parecon.

First here is the definition that wikipeida has for participatory economics. “often abbreviated parecon, is a proposed economic system that uses participatory decision making as an economic mechanism to guide the production, consumption and allocation of resources in a given society. Proposed as an alternative to contemporary capitalist market economies and also an alternative to centrally planned socialism or coordinatorism, it is described as "an anarchistic economic vision"^[1]. It emerged from the work of activist and political theorist Michael Albert and that of radical economist Robin Hahnel, beginning in the 1980s and 1990s.”

First lets look how production decision are made under Parecon

“To implement the decision making principle, a parecon would be organized in consumers' and producers' councils. Many individuals would participate in both types of councils. These would be the respective equivalent of workers' councils. Geographically, these councils would probably be nested with neighborhood councils, ward councils, city or regional councils and a country council. Decisions would be achieved either through consensus decision-making, majority votes or through other means compatible with the principle. The most appropriate method would be decided on by each council. Local decisions like the construction of a playground might be made in the ward or city consumers' council, probably interacting with both city and countrywide producers' councils. Countrywide decisions, like the construction of a high-speed mass transportation system, would be discussed by the country consumers' council, possibly interacting with a city producers' council in the city where the materials are produced, or countrywide or international producers' councils. The producers' councils would probably correspond to workplace councils in each workplace and similar workplaces would group into nested councils on successively larger geographical and linguistic scales.”

The problem that this system has it the same that all command economic have in that they really on a relatively small group of people to decided what should be produced, how it should be produced and how much should be produced. Robin Hahnel on of the developers of Parecon has argued that since the decision making process is distributed among a number of decision making bodies that it is not central planned, and he is right that technically its not but the problems that face planned economics are the same regardless of whether or not they are centralized or decentralized, they still produce economically inefficient distributions of economic resources relative to market economics. In the market the distribution of resources is decided by the interaction of a large number of producers and consumers, in many case one individual or group is both a producer and consumer. While no single entity in the market has complete or perfect information, they do all have some information and the market combines that information and then produces a set of prices for goods and services and then consumer use this information to decide what they want to buy and how much and producers decide what to produce, how much to produce, and what inputs to use, worker decided how much they want to work, ect. The problem is that since no single group has complete information and the set of information is constantly in flux, centralized planners are unable to make economic efficient allocations of resource.

Next we will look at the problem with wages under Parecon:

“Promoters of participatory economics hold that it is inequitable, and also ineffective, to remunerate people on the basis of their birth or heredity, their property, or their innate intelligence. Therefore, participatory economics advocates as a primary principle reward for effort and sacrifice. Therefore someone who works in a mine — which is dangerous, uncomfortable, and confers no power whatsoever on the worker — would get a higher income than someone who works in an office the same time, thus allowing the miner to work fewer hours and the burden of highly dangerous and strenuous jobs to be shared among the populace. Additionally, participatory economics recognizes a certain leeway for exemptions from the remuneration for effort principle. It is suggested that people with disabilities who are unable to work, children, the elderly, the infirm and workers who are legitimately in transitional circumstances, can be remunerated according to need. This said, participatory economics posits an obligation for every able adult to perform some socially useful work as a requirement for receiving reward, albeit in the context of a society providing free health care, education, skills training, and the freedom to choose between democratically structured workplaces with jobs balanced for desirability and empowerment. The starting point for the income of all workers in participatory economics is an equal share of the social product in the form of equal consumption rights for private and public goods and services. From this point incomes for private expenditures and consumption rights for public goods can be expected to diverge by small degrees reflecting the choices that individual workers make in striking a balance between work and leisure time, and reflecting effort ratings assigned by their immediate peers”

The first problem with this is that assumes the value of good is derived from how much effort by labor goes into production, when in reality the value of all goods is subjective and derived from what consumer are willing to pay for good at each quantity that is produced, water while extremely important for life is relatively cheap because there is a lot in most areas and precious gems that often have limited uses are relatively expensive because they are rare. Labor like all other inputs derives it value from its share of the value of the good produces, ie it’s the value of labor or any other input comes from the role it plays in producing a good or service. The only role that danger plays in the value of labor is that a dangerous job will have to pay some kind of premium over jobs that require a similar skill set but are less dangerous in order to attract workers. For the example of the miner and the office worker, while the job of the miner is undoutably far more dangerous than that of the office worker, in many cases the value of the product produced by the office worker is more valuable than that of the miner, so the value of the labor of the office is worth more than that of the miner in this case.

The second problem that Parecon faces when it comes to wages is that ignores that wages play in producing an incentive for people to pursue higher levels of education. Education is costly, not just in money, but also in time, mental stress, ect, and the opportunity to gain higher wages is one of the reason that many people undertake additional education. Under the Parecon system there would be little incentive for people to pursue additional education since wages are linked to effort of labor, its danger and how uncomfortable it is, since highly educated jobs tend to be less physically strenuous and less dangerous they would not command the same wage premium that they do under market economics and the long run effect would be fewer people pursuing higher levels of education.

Now let’s look at how Parecon would destroy many of gains from the division of labor:

“Some tasks and jobs are more comfortable than others, and some tasks are more empowering than others. To achieve an equitable division of labour, it is therefore proposed that every person must do different tasks, which, taken together, bring an average comfort and an average empowerment. For instance, someone who works in a facilitation board for one year might then have to work in a steel plant, or in another uncomfortable workplace of his or her choice, for a year, or else would not get a higher salary than the standard for everyone. This assures that no class of coordinators can develop.”

The division of labor means that people specialize in one particular area of work, by doing so they gain expertise and experience in it and become more productive and people tend to be attracted to jobs in areas was that they are naturally good at. Historically the division of the labor has been one of the major factors that have driven economic growth and this economic growth has been the main reason that people now have a far higher standard of living than in the past, and the continued specialization of labor has helped to increase productivity in many industries, benefiting the economy and society in general. The Parecon system by forcing people to rotate jobs would eliminate many of the gains from the division of labor, people would have little incentive to gain expertise in a particular job since they are just going to be rotated to another one in a year or so and even if they wanted to gain expertise in one particular field by rotating people in and out of vastly different jobs it would be impossible to gain the experience necessary to increase their productivity.

Secondly it would discourage people from pursuing high levels of education since what is the reason to give up the time and energy to obtain a specialized level of education when you are just going to be rotated between jobs?

In conclusion Parecon face most if not all of the same problems that traditional forms of socialism/communism do, the inability of economic planners to produced a distribution of resources that is as economical efficient as the market economy, but also it feature serve to discourage people from pursuing higher levels of education.

Why the Federal Reserve Should NOT cut the interest rate

A lot of people are pushing for the Federal Reserve to cut the interest rate in response to the problems in the sub-prime loan industry, lender want the cut in order to easy the burden of loan defaults and some in the financial sector want it to push up the values of their investments, but its my belief that cutting the interest rate at this point would be the wrong thing to do. The first reason is that the interest rate should only be change by the Federal Reserve in order to respond to changes in the economy as whole, the sub-prime loan problems are not a broad based economic problem, in real terms its only affected the still relatively small amount of home owners that are defaulting on their loans, the financial institutions that hold those loans or have invested in them, and home construction and retail industry, both of which are coming off a multi year boom that has left many housing markets in the United States over valued and correction is now need to return those houses to there true non-market bubble price. Yes the effects have spilled over into the larger stock market and depressed stock prices, including many companies that will not be directly affected by the sub-prime loan market, but as investor confidence recovers and the bad companies are sorted out from the good, there prices will recover, and until then this creates a buying opportunity for investment how will have the chance to buy stock in good companies that have been over sold and now over valued.

There is nothing fundamental wrong with the United State economy, growth in the second quarter was about 4 percent, which is very strong, and while it expected to be weaker for the rest of the year, there is no signs of recession, and expected growth is still expected to be stronger than growth in the Euro Zone, and a long with that the manufacturing sector in the US is doing well, productivity is growing, our productivity is the highest in the world, and unemployment is low.

The second reason is that cutting the interest rate at the moment would send the wrong signal to companies that engaged in making risky loans, encouraging them to continue making these loans expecting government intervention if they turn bad on them. The government needs to stay out and let the market work the problem, in the long run it will be best for everyone.

Line Item Veto and other

Governor Blagojevich used his line item veto last week to cut about half billion dollars from the Illinois State budget last week, normally I am all for cutting spending and pork, but that not what the Governor was doing, he was cutting this money with the intention of using to fund his health care program that the State General Assembly refused to pass. The Governor is attempting to do an end run around the elected representive of the people and use these cuts to fund a program that they would not pass, this shows how little respect Governor Blagojevich has for the state, its people, their representatives and its institutions, there is a reason that the budget making process is not entrusted to one man but instead negoiatated between the legislative and the Executive. Think of the reaction if President Bush tried to do the same thing. Hopefully enough of the Senate Democrats will see the light and join with there Republican counterparts and work with the House were both Democrats and Republicans seem willing to over turn the veto. If not Speaker of the House Mike Madigan has made it quiet clear that he intends to challenge the Governors ability to use the funds from the veto programs in court.

On the National side, Alberto Gonzales resigned today as United State Attorney General, not matter what you think of his policies or the Bush Administration, the way that Alberto Gonzales handled the events that happened around him showed poor judgment and it is probably best for everyone that he is gone.

The Governor loses more backers

Governor Blagojevich’s antics during the budget debates have gotten so bad that even his long time backers in the AFL-CIO no longer consider him to be trust worthy, they have gotten behind a proposal that would cut the Governor out of the decision on how school funding is distributed, instead putting it in a lock box that would be a controlled by a 3/5 super majority vote in both Houses of the State Assembly. On a similar note if there is no new budget or temporary budget that means that schools districts in Illinois will not be getting there share of state funds on time which could put a number of them in a bad position, particularly in counties like Tazewell were the county treasures has no intentions to distribute property tax revenues until September and even then he will make a only a 45% distribution at first.

This just goes to show how much the Governor’s leadership has failed that even the Unions no longer trust him. He has consistently failed to recognize the reality of his political position and give up on programs and taxes that there is little or no support for or to work with three of the four leaders of the State Houses. The only question now is how much longer can he count on the support of State Senate President Emil Jones? For this year what we need is a zero growth budget and then for next year the public needs to push it representatives in the State House and Senate to start the new budget from scratch with a zero-bases budgeting system.

More Taxes

It been proposed in the Illinois State Senate that the Government oppose a 3 percent tax on businesses that spend less than 4 percent of there payroll on health care insurance for their employees in order to pay for a stripped down version of Governor Blagojevich health care plan, this plan has a number of problems with it. First it makes the assumption that companies have a duty to provide all or most of their employees with health insurance, while in many case it is a good policy for companies to offer health insurance as a benefit in order to increase their likely hood of attractive and retaining qualified employees but its not the place of the government to decide what benefits package a company should offer and penalize them if they don’t. Also some companies may choose to pay their employees more in lieu of providing them with health care, paying them enough that they could purchase it on their own. Many smaller companies might not have high enough profit margins to be able to afford either the cost of the 3 percent tax or spending 4 percent of their pay roll on health insurance cost.

The next problem with this is that will discourage companies from high low skilled/unskilled labor because these are the employees that companies gain the least benefit from offering health insurance from and if the company has a mixture of highly skilled workers that they offer insurance and low skilled/unskilled workers, the more low skilled/unskilled labor that a company hires would increase their overall payroll and decrease the percentage of their payroll that goes to health insurance cost. This would encourage companies to hire fewer low skilled/unskilled labors in Illinois, particularly large companies that can more easily shift this kind of work out of state, and raising the unemployment rate for these groups in the state. This means fewer jobs for Illinoisans overall and slower economic growth and it will make Illinois a less attractive place for companies to do business in by raising the cost of doing business here. Final this will end up being a stealth tax on the consumer as some portion of the tax will be passed on to the consumer in the form of higher prices, as with any other taxes of this nature it will have a larger effect on the lower income groups that spend most if not all of their income on consumption and lesser effect on higher income groups that save a portion of their income.

Comes down to the crux of the problem with the Illinois State budget, that it’s not a revenue problem but a spending and management problem, some of the state leaders want to spend far more than the state can afford to spend.

On sad note former Illinois State Representative, Jay Ackerman was killed this week in a accident, I known Jay and his family for a number of years and they have my deepest sympathies during this time.

Cigarette Tax Increase

The new proposal on how to add more revenues to the Illinois budget is to double the tax on cigarettes from 98 cents to a dollar and 98 cents. The cigarette tax increase is attractive to many State Senator and Representive that don’t want to raise taxes in general because one it only directly affects a small percentage of the Illinois population and target a product that most people dislike and that many moral oppose. It far easier to sell a “sin” tax to the general public than a general increase in the sales or income tax. While I don’t smoke, dislike the habit and could care less what the prices of cigarettes are, I still oppose the increase in the cigarette tax. The first reason is that it is a highly regressive tax; the poorer in society have a higher likely hood of being smoker and would ended paying a higher percentage of the tax than the percentage of the state income that they make up. Second if the increase in the tax is large enough it would serve to encourage people in the border area of the states to travel to near by state in order to purchase cigarettes, according to some estimates if the tax increase go throu consumer in downstate Illinois would be able to save around 20 dollars a carton by buying cigarettes out of state and consumer in Chicago could save around 30-40 dollars. The other side of this is will encourage the black market sales of cigarettes and the criminal eliminates that comes with black markets and smuggling. If the tax is high enough it will allow black marketers and even more criminal eliminate, such as gangs to make money by either stealing cigarettes or smuggling out of state cigarettes and then selling them, particular in Chicago/Cook County were prices are even higher. The third problem is that there are around 8,000 jobs in Illinois that depend directly or indirectly on the sales of cigarettes, if the tax increase leads to a decrease in the (legal) sale of cigarettes in the state, these jobs will be threaten and associate income and business tax revenue from them

The Final problem is that it makes a large part of state review, around a billion dollars subject to changes in the amount of cigarettes that are sold in the state and decline in sales of state cigarettes would reduce state revenues and increase in smoking, which I am sure most people would agree is a bad thing, would increase state revenue.

Today the Governor announced plans to try and prevent insurance companies from basing increases in health insurance premiums on changes in the insure health, which is about the same as saying an insurance companies can not base auto insurance on the drivers history of accidents or tickets or housing insurance on the home location and if it in area that prone to flooding, fires, hurricanes, tornadoes, ect. Since Insurance is protecting an individual against a possible negative event from happening to them, an actuarial fair premium is equal to the cost of the negative event times the likely hood of it happening spread out over the time period of the policy. So a person with a higher likely of the negative event happening to them should pay more and some with a lesser change of the event happening would pay less. Since Insurance companies do not have access to perfect information on the likely hood of something happening they have to use information like a person health history and other risk factors to decided on the premium level, and usual people with lower risk end up paying more and people with higher risk pay a little less than they should because of the information asymmetries inherent in life forces insurance companies to pool clients together so that they can cover there pay outs with the premium coming in from a diverse group of clients some that are low risk, some that are medium risk and some that are high risk, ect, few insurance companies actually make much, if any of there profits from people paying in more in premiums than they pay out in claims, most of them make it from investing the premium during the time periods before they make pays outs.

If Governor Blagojevich gets his way and insurance companies can not use a person health history or changes in deciding premium levels the end results with be that people that are at low or medium risk will end paying an even higher rate than should to balance out people that are in higher risk groups that are no paying even less than they should. Those people that are in the highest risk groups and could benefit the most from insurance will end up having even hard time finding companies to insure them since it will be more difficult for those companies to charge them anything approaching a fair premium and most of them will not want to pass on to much of the cost to lower risk clients that may responded to large increase in their premiums by getting rid of their insurance or moving to lower premium companies and no insurance company can stay in business just covering high risk clients. While the Governor may claim that he is working to help families in Illinois, in the long run if he gets his way he will be making it hard for them to get insurance all together if they are in high risk groups.

The insanity in Springfield continue today with the Illinois State Senate showing how much of waste of tax payers money these special sessions are. After meting for a minutes with many of the Democrat senators not in attendance, the session was adjourned it with conducting any business or taking any votes. Later on rumor surfaced that the Governor told State Senate President Emil Jones to tell his member not to bother showing up today or Monday, while the State House is expected to be in session both days.
The entire overtime session is joke and waste of tax payers money, there is going to be no budget until the Democrat and Republican leaders of the State Houses and the Governor come to an agreement. The Governor is going to have to give up most of his massive spending increase, because the State House is not going to pass them, and rightfully so. The Governor seems more interested in playing political games and trying to cause problems for his rival, Speaker of the State House Mike Madigan.

Normally I dont post two blogs on the same day, but the lastest insanity out of the Governor's office is so extreme, I had to mention. About an hour ago the Governor announced that he was going to sue State House Speaker Mike Madigan for not holding the Special Session when the Governor decreed it to be held, though it would seem that according to the State Constitution, the Speaker has no obligation to hold when the Governor demands to be held. Let it sink in for a moment, the Governor intends to waste taxpayers money on a lawsuit that he will most likely lose because the Speaker of the House, who is in his own party, didnt have a Special Session the extact hour he wanted?
Can anyone think of Governor that has this many problems with a State House control by his own party and gotten so little accomplished?

The budget debate in the Illinois General Assembly has continued to bare no fruit and has grown to even more or a debacle in large part because of Governor Blagojevich's lack of leadership. The Governor called a special session for the weekend and then tried to set the time, despite the lack ability of the Governor to set times for Illinois General Assembly, and then accused the Speaker of the Illinois State House, Mike Madigan, of breaking the law by setting a different time for the session than what he wanted. He also called The Speaker a Republican for opposing his massive spending and tax increase, thou I am sure no Republican would claim the Speaker as one of our own. The Governor also threaten to use the state police to force members to attend the special session, despite the fact that under the 1970 Illinois Constitution, our current one, the ability of the Governor to use the state police to force attendance came from a court ruling under the old Constitution and has no current standing under the new one. Relationship between the Governor's Office and The Illinois State House has fallen to the point, that a Republican member raised the issue of Impeach. The Governor's proposed lease of the lottery failed by a vote of 78-6 today in the House and a Democrat member of the State Senate said that it stood no chance of passing in the Senate despite the effort of the Governor's pawn State Senate President Emil Jones attempts to pass it. The Governor has also taken in insulting members of his own party that do not support his agenda, implying that they are bad Democrats, State Senator Mike Jacobs said it remained hims of when the Nazis would talk about good Nazis. Governor Blagojevich is so devoded of leadership that all he can do is restort to name calling and insulting leading members of is own party instead of working to produce a budget that controls spending, taxes and doesn't increase the State's debate burden.

In good news an article in the Springfield State Journal Register had an interview with a number of young minimum wage workers and they displayed a good grasp on the effects of an increase in the minimum wage on prices. They all said that they had mixed feeling about the minimum wage increase because they realized that it would lead to higher prices in the long run. Supports of the minimum wage increases like to point out to studies that show little or no job lose from hikes in the minimum wage, but the problem with the studies they use is that tend to look only at either people that are currently employed in minimum wage and see if they are fired or laid off or they look at the short. Longer run surveys show that increases in the minimum wage lower the amount of new jobs in that range that are created. If people want an example of this in their everyday life look at grocery stores like Kroger's or Wal-Mart and how they have added in self-checkers in their stores to replace regular check out isles, the reason for this is that the cost of installing and maintaining these machines is now less than that of hiring more checkers. Along with this many Union contracts have wages that are tied to the minimum wage level and any increase in the minimum wage pushes up these wages levels to regardless if increase in productivity justify the wage hikes.

Reforming Illinois Government Part 2

This is the second part of my essays on reforming state government and will focus on budget reforms. The first part of budgeting reforms involves a complete review of every state program, department and agency. I already gone over this some in my previous post, about reviewing program, departments and agencies for need, cost effectiveness, duplication of services or if it would be more efficient to decentralize some of them to the county, municipal or local governments. Second is to bring the states pension system into line, the first step is that the State needs to began full funding the system every year and not put off payments, when the state puts off payments it lose the interest that would be gained for each year that the payment is put off and because of this the state has to pay more money into the system in order to make up for lost interest. For example if the state puts off a billion dollar payment into the pension system for 3 years, the state would have to put 1.2 billion dollars into the system at that point to make for the lost interest. So in the long run, paying off the states pension system obligation as early as possible will save the state money in the long run. The state needs to move from a defined benefits systems to a defined a contribution plan, under the current system which is a defined benefits system the state promises to pay retirees a set amount to a defined contribution system in which the state matches, up to a certain point, each employees contributions to a retirement fund, similar to private retirement funds like 401Ks. This would benefits both the state and the employee; it would lower the cost to the state of the pensions and give the employees more control over their retirement and the certainty that the system would be funded. All new employees would be put into this system, while all existing system would stay in the existing system.

State departments and agencies should be required to list there operations and programs each year, rank them by importance and then reveal the cost of each program. This will give more information to both the voters and the members of the General Assembly about the cost of programs, there importance and will make fund decision easier and more informed.

Reforming Illinios Government- Part One

The one thing that Governor Blagojevich and his supports is right about is that the Government of the State of Illinois needs a massive overhaul, but they are wrong about how to go about, the Governor and his backers want to expanded state spending and entitlement programs and increase the amount of taxes that the state charges and collects. This post is going to be the first of multi-post discussion on how the government of the State of Illinois can be reformed to make it more effective and less costly for the public, any comments or suggestion are welcome.

To start out with the state needs to undertake a massive review of every state agency and program, to see if they are really needed and then if they are the next question to be gone over is if multiple programs or agencies or department are performing the same of similar functions and if they are would it be more cost effective. Each Department, Agency and Program would then have it operations reviewed to evaluate how cost effective they are and make suggestion on how they can be improved. Along with this an element of cost-benefits and return on investment analysis would be performed on all new state project and state programs, while because of the nature of government and public project and programs cost-benefits and return on investment can not be the sole decider of whether or not a public project or program should be enacted like in the private economy, but it can still be very use on provide information on if the benefits of project or program out weight it costs and can be used to compare projects and program when it comes to making decision on what programs should be funded and how much funding they should get.

On the opposite end of consolidating duplicate programs into one department or agency, some programs should also be evaluated to see if it would be more cost effective to decentralized and instead of administrating them at the state or higher level if they should be administrated at the county or regional level. Or it in some cases program might be better managed and more effective if instead of the state running them if they gave grants to the county and metropolitan governments to run the programs themselves.

The Illinois Revenue and debt structure also needs a complete review, the Illinois tax system needs to be reformed and tax burden on the public reduced and the economic distortions that are caused by taxes need to be minimized. How the state funds education needs to be reviewed, many people want to break the link between property taxes and education funding, but the problem with that is currently there is relationship between property taxes, educational quality and housing values. Districts with higher property taxes tend to have better school system and the better school system tends raise housing values, by an amount about equal to what they pay in property taxes. If you break this link, it might become harder to get people to support the same level of taxes to fund schools because those people that don’t have children lose one of the benefits of having good schools.

The Budget Impass continues

The budget stalemates continue in Springfield, today 22 of the 114 members of the State House of Representatives, lead by the Governor’s point man Jay Hoffman, sent out a letter calling on the House, Senate and Governor to negotiate on a budget and calling the budget passed by the House and Speaker Mike Madigan unaccepted and they want a large increase in spending. Speaker Madigan’s budget, while far from perfect, at least controls spending for the next year and does not increase the tax burden on the citizens and business of Illinois.

In the long run what the State of Illinois is a complete overhaul of it finances and a review of every state program to first see if the program is need or if it duplicates a service already provide by other programs. Then if the program is needed to see if it is run in the most cost effective manner, and if it is not being run in a cost effective manner, then the program should be corrected. This should also be extended to entire state agencies, to check for redundancies and efficiency

over time hell in Springfield

The budge impasse in Springfield continues with very little hope of the General Assembly and the Governor coming to an agreement on a new budget for the state. A big part of the problem comes from Governor Blagojevich refusal to abandon his planned spending increase and the accompanying 7 billion dollar tax increase in the form of the Gross Receipts Tax and payroll tax. This despite the House voting 107-0 against the tax increase and it not even coming for a vote in the State Senate because legislative leaders realized that it would fail and the failure of the State Senate to pass his health care plan, despite Senate President Emil Jones being a close ally of the Governor.

Along with that the Governor is continuing to push for the sale of the state lottery, while privatization of state run industries is often a good idea, the Governor has not offered a detail plan on how he would make up for the 600 million dollars a year that the state would lose in lottery revenue. Other than claiming it would be made up by investing part of the money from the lottery sale, but the amount that he would plan to invest would be required to make a return of about 10-13 percent to make up for the lost in lottery revenue and it is all put impossible to make that kind of return with out taking on some kind of risk. Along with this the lottery sale is not to popular with the members of the State General Assembly and it opposed by State House Speaker Mike Madigan. The public needs to put pressure on Governor Blagojevich to drop his tax increase and massive increase in spending on social program and accept a zero or low growth budget and start working on future budgets that would cut back on unneeded state spending and reduce the overall size of state government.

More on the Budget

Yesterday it came out that Illinois Senate President Emil Jones has punished certain Democratic members of the Illinois State Senate for opposing the Governor’s proposed Universal Health Care programs and massive business tax that would go along with it. Senate President Emil Jones stripped South Side Chicago Senator Lou Viverito of his position on the powerful Senate Rules Committee and barred him Leadership meetings, because of his opposing the Governor’s policies. In Particular Senator Viverito opposed the Gross Receipts Tax and the addition of four new casinos to the state and slot machines in race tracks.

Governor Blagojevich also demand that the State General Assembly stay in session for 5 days a week until the budget is complete which seems fun coming for him, seeing as he barely been in Springfield during the budget debate and up until this point has made no effort to exert any kind of leadership. It is interesting to note that almost every day this week the Governor has flown back home from Springfield to Chicago each night and then flown back to Springfield each morning, on the tax payers dime of course and unlike the members of the State General Assembly, who have to pay for their hotel room and food now since the regular session is over and they have lost there 125 dollar a day expenses account, the Governor has a tax pay provided Mansion to stay in Springfield and food provide, not that he stays in the Mansion much.

Budget Fiasco

The Illinois State General Assembly has failed to pass a budget during it regular session and thus will be forced to go into an overtime summer session, which of course will cost the taxpayers more money. This is all due to a lack of leadership on the part of Governor Blagojevich and State Senate President Emil Jones, the Governor sprung a proposed budget that include massive new spending and 8 billion dollars in new taxes that would of severally damage the State’s economy, and then instead of sitting down with legislative leaders and talking about a budget and negotiating, when it became clear that most of the State and members of the General Assembly opposed the increase in spending and taxes, he and Senate President Emil Jones tried to shove it down the throats of the legislator and paint opponents of the new budget as being against the will of God. Predictably it failed miserable, a Governor whose party has a major in both Houses of the General Assembly failed to be able to even get his budget through, because he refused to negotiate on a budget that was clearly unacceptable to a large section of the State’s populace and Representatives.

The Governor Loses it

The Illinois Budget battle and Governor Blagojevich entered a new level of insanity today, when Governor Blagojevich reportedly threaten Democrat State Senator Mike Jacobs of East Moline when he refused to support Senate Bill 5, the Governors massive new Health Care program that the State cannot afford. The Governor reportedly offer to release 75 million dollars for Western Illinois University which is in Senators Jacobs district if he support the measure and then when he still refused, the Governor reportedly called the President of WIU and said that Senator Jacobs had cost the University a promised 14 million dollar grant and threaten to run a candidate against him next year and went into a profanity laden tirade and doubled his fist like he wanted to fight him.

Heres the link to CBS interview with Senator Jacobs, http://cbs2chicago.com/video/?id=32925@wbbm.dayport.com.

This is just another example of the Governors inability to lead, he can not even get all of the Senators in his own party to support him. When he cant win he resorts to threats and attempts at intimidatation.

There has been a lot of talk about expanding gambling Illinois as part of the State’s new budget as away to increase the State’s revenues with out raising taxes, according to rumors there may be as many four new land based casinos, expansion of existing river boats, slot machines at race tracks, phone betting and sport booking making. While I have no problem with the legalization of gambling in Illinois is with the state licensing system for casinos and reports that one of the casinos may be owned by the city of Chicago. The Illinois licensing system has already been shown to produce corruption and problem with owner with question background and political ties, as can be seen by the troubled current ten licenses for a river boat casino that original was going to be in Rosemont, which has not been used yet because of legal problems. With Chicago history of corruption and ties between government official and criminal elements does anyone think that it is a good idea to give the city of Chicago ownership of a casino?

Another questionable piece of legislation tied to the expansion of gambling would give 10 million of the 40 million dollars expected in revenue from the 10 gaming license to go Chicago State University with the remaining 30 million being split between all of the other state universities. One has to wonder why Chicago State, which has only 6,000 students and is the small of the state universities, should get a quarter of the new revenues and far more than the larger state universities. The only possible reason could be the strong ties between Chicago State and Illinois State Senate President Emil Jones.

Tonight the Illinois State House of Representatives is set to pass a budget that is very low in spending growth that would include 290 million dollars more in funding for schools and in increase in State revenues of 1.1 billion, 800 million of which would come from growth of State revenues due to increase tax revenues from economic growth and the remaining 300 million would come from the proposed closing of tax loop holes. While this budget doesn’t include spending cuts and reforms that the State direly needs, it is far better than the massive increases in spending that the Governor want and the economy crippling taxes that would come with it. There is going to have be some major changes in the leadership and make up of the State General Assembly before we see the fiscal changes that the State needs and the tax payer deserve.

State Government Waste

Today more information about government waste in the office of Governor Blagojevich has come out. Today it turned out that the total bill from the lawsuit against the State law that total cost of defending the unconstitutional violent video game law that Governor Blagojevich introduced was not 500,000 dollars as his office previously claimed, but over 1 million dollars due to legal bill incurred by hiring lawyers to defend the Governor. The cost of the additional 500,000 dollars were charged to such varying departments as the Departments of Human Services, Children and Family Services, Public Health, Corrections, Revenue, and the State Police. What reason would there be for these departments to pay for the legal bills related to a video game law? The answer is there is no real reason, the reason that it happened this way was so that the Governor office could try and cover up the true cost of the law suit. So a bad law that should never have been passed, bug the Governor pushed through in order to try and win more support for his re-election bid ends up costing the tax payers over a million dollars.

Yesterday State House Speaker Mike Madigan indicated that there is not enough support to pass an increase in the state sales and income tax. Hopefully this mixed with the death of the Gross Receipts Tax will force the State General Assembly to look close at spending and cut back on needed spending and programs and inject some fiscal discipline into the state. If the state can not be responsible with what it is taking in now, why should they be trust with billions more of our dollars?

Protecting Incumbents and Hurting Voters

It seems all but certain that the Illinois will move it primary to February 5 next year from its traditional March date. Will it’s good that Illinois will have stronger voice in the Presidential Primaries; this will be in bad in part because the state is also moving the primary for all other state, county and federal offices back to February the 5^th too. This is gong to provide more protection for incumbent candidates. The early primary date means that campaigning will have to start in November and December during the holiday season, when a large percentage of the electorate will not be paying attention. This is going to benefits incumbent candidates since they have a stronger name recognition and candidates that maybe trying to challenge them during a primary will have hard time making up this advantage in name recognition since it will be harder for to get their name out their because most voters will not be paying as much attention to political races during the holiday season and they will only have the end of January to try and make up for this. It will also favor candidates with more money and support for the political structure since they will have an advantage from the start and it will be hard for outsider candidates to one get name traction and race money and then use that make up for any weakness they have in name recognition or political insider supports that other candidates may have. While Illinois needs to move back it Presidential primary so that will have more of say in choosing the Republican and Democratic nominee for President, we need to leave all of the other primaries where they are. Everyone should contact their State Reps and Senators and tell them this, give us a stronger voice in the Presidential Primaries, but don’t give incumbent and name candidates extra protection.

Every one that is boxing fan or has any kind of interest in it should watch tomorrows card on HBO, while the main event between Middleweight Champion Jermain Taylor and former Welterweight King and Lt. Middleweight Champion Corey Spinks may not be much of fight, the under card fight of Edison Miranda and Kelly Pavlik could be a classic. Pavlik is a tall stronger aggressive boxer-puncher and Miranda is a all action puncher with a huge shot, who batter top Super Middleweight prospect Allen Green in his last fight.

The Death of the Gross Receipts Tax

I know it’s been a wile since I Have last posted, but I have been busy with finals and grading papers, so here we go. Last week the Illinois State House held an advisory vote on the Gross Receipts tax and 107 seven members voted against with 7 voting present and zero voting for it. Immediately before the vote Governor Blagojevich told his supports in the Illinois House to vote against the measure saying that something like this was to important for advisory votes and that they should vote no as protest. IT should be clear the real reason he told them to vote no was he realized that there would be close to hundred no votes any way and he knew that getting hundred no votes would pretty much kill the Gross Receipts Tax, so this was a measure of desperation on his part.

Every voter in the State should write his representive in the State House and thank them for voting no on the Gross Receipts Tax. For to longer the citizens of Illinois have been asked to pay for wastefully and unneeded State programs, by both Democrats and Republicans. It’s time for that to change, the State need finical responsibility before there is an consideration of new taxes, because if not the new tax revenues will be wasted and we will ended up in the same boat we are in now in 5 to 10 years. New taxes will hurt everyone in the state, reducing the incomes of the states poorest, middle class and richest alike and hurt economic and job growth.

The Illinois Medical Soceity and the Gross Recepits Tax

Today the Illinois Medical Society the leading medical organization in the state representing over 13,000 doctors came out against Governor Blagojevich’s 7 billion dollar tax increase plan, the Gross Receipts Tax and the much less mentions but just as bad payroll tax. While the IMS support medical reform in Illinois it oppose the Governors the plan as to costly. IT tells you something when a group whose members would stand to gain a lot of money from a plan opposes, it tells you that it’s a very bad plan for the state.

Illinois at the moment does not need any new tax, the state is finally recovering economically after lagging behind the rest of the nation and any added tax burden would hurt the State’s recovery. What the State needs is fiscal reasonability on the part of the General Assembly and the Governor, over his 4 plus years in office the Governor has continued the state bad tradition of not full funding it pension programs, but he has also added millions, if not billions, of dollars in spending on unneeded programs that in some case duplicate services offered by existing programs. How about before adding any new taxes we try and control spending and close up the loopholes in the existing tax laws? The Governor like to say that opponents of his Gross Receipts Tax are all greedy business and their lackies, but opposition has come from his own party and from liberal groups that are not usually consider to be pro-business, such as the Illinois Green Party.

Taxes and the Illinois Economy

Too much of the talk about the Illinois State budget has been about how to raise taxes, not whether or not it is the state’s best interest to have more taxes. Illinois has lagged behind the rest of country during the economic recovery of the last few years and we are final now starting to catch up, the last quarter had one of the strongest periods of economic growth for the State since 2000. Taxes create a number of distortances in the economic that hurt economic growth, not only do they take money out of the hands of the consumer that could be used to buy goods and service or make investments that produced new jobs and economic growth, taxes also produce a large deadweight loss, for a further explanation of deadweight losses see my previous posts, because of these dead weight losses, for every dollar you take out of the economy, you loses another 60 cents to a dollars in economic activity. What this means is that unless the government programs funded by those tax dollars produce a $1.60-$2.00 dollars in benefits for every tax dollar spent, there is going to be a net loss to the economy. This net loss means is slower economic growth, fewer jobs, lower paying jobs, ect. So both the State decides to raise taxes or add any new government spending programs, they and the public need to take a long look at the cost and the benefits and make sure that the benefits outweigh the costs. While many government programs may seem to be nice and people might like them, it does not mean that they should be put in place because there cost to society in general is greater than there benefits. The Illinois economy is final starting to recover, the Governor, the General Assembly and the voters should take a long look before support any taxes or spending programs that will hurt economic growth because strong economic growth will help far more people than any government programs.

Medicaid Bills and the Gross Receipts Tax

This Month Governor Blagojevich missed the chance to pay 650 Million dollars in Medicaid bills that the State owes to health care providers, on April 4 the Illinois Comptroller office sent a letter to the head of Department of Healthcare and Family Services indicating that they would pay the bill if the DHF would forward them the invoice, DHF not only did not send them the invoice, but it did not respond at all to the letter from the Comptrollers office. What this all means is that health care providers in Illinois will not be paid on time again and this along with the Illinois history of not paying its Medicaid bills in a timely fashion or completely means that health care providers will have yet another reason not to accept patients on Illinois Medicaid. Several months ago to major health care providers in the Midwest announced that they will no longer accept Illinois Medicaid patients or people in the Governor’s All Kids program and this will just give more incentive for others to follow. There are some rumors that the reason for this is that Governor Blagojevich is trying to put the squeeze on the health care providers in order to try and black mail them into support his new taxes and health care programs. Essential it would seem what he is saying to health care providers is back my health care and associate tax increase or else no one is going to get paid. The other question is if Illinois can not pay it Medicaid bills on time as it is and the system is badly mismanaged, as most people would agree, why in the world would we want to add another expensive health care program to the state rolls?

Fred Giertz a professor of economics at the University of Illinois called Governor Blagojevich’s proposed Gross Receipts Tax an overreaction and stated that it would have cascading effect, tax good multiple times as they move through the economy. This cascading effect means that the actual amount that would be paid to the State through the Gross Receipts Tax would be fair higher the stated rate of 1.95% on service and .85% on manufactured goods. For example if you had a good that went goes through 5 production stage before being sold to the consumer you have something like this for a manufactured good.

Stage Price Tax

1 $10 $.09

2 $15 $.13

3 $17 $.15

4 $20 $.17

5 $25 $.21

So in the end the tax paid would $.75 or 3% of the goods final cost, while 75 cents seems small, when you multiple this through million of goods and services sold each year in the state, the amount ended up much larger. This assumes that none of the cost of the tax is passed on but lets see what happens if 50 percent is passed on with the same set.

Stage Price Tax

1 $10 $.9

2 $15.04 $.13

3 $17.10 $.15

4 $20.17 $.17

5 $25.25 $.22

So with 50 percent of the tax being passed on we see that the amount that the State takes in increased slight and the price paid by the consumer rise be 25 cents or 1 percent. This is small for a good like this you have to remember on a 20,000 dollars care this would lead to increase of 200 dollars. When you multiple this effect through all of the goods and service in the Illinois economy you’re talking about billion dollars. The amount of money that would be lost to the consumer in aggregate would be about equal to the amount that State takes in through the tax.

Plans to hide the cost of the Gross Receipts Tax

Before I have talked about how most of the cost of the Gross Receipts tax will be passed on to consumers in the from of higher prices, it seems that Governor Blagojevich is well aware of this because hidden in his proposed bill is a passage that would make it illegal for business to place the cost of the tax on an bill to their costumers. While there are of course numerous federal, state and local taxes and regulation are passed on to the consumer in the form of higher prices for goods and services that are not itemized and presented to the consumer but are hidden, this is the first time that I know of that a bill would explicit make it illegal for a business to tell a consumer how much of the cost of good is the product of a specific tax. It would be the same as if the governments forbid telecoms or utilities from putting on their bills how much was being paid because of taxes. I don’t think that business would itemize their bills enough to include the Gross Receipts tax either way, it would just show as higher prices, but why would the Governor want to make it illegal for business to give their costumers more information?

The reason is pretty simple, Governor Blagojevich realizes that in order for the Gross Receipts tax to have any chance to pass the State General Assembly he has to play up the populist rhetoric of it not being a tax on the general public but one on “greedy selfish” business that don’t want to pay their fair share to the state. No State Representive or State Senator in district that they have any chance of facing serious competition in, is going to want to vote for a 7 billion, if the public knows that they are going to paying for most of it. They don’t want that on record when they are up for re-election, nor does Governor Blagojevich, particularly if the rumors are true that he plans to run for a third term in 2010. That why you this is hidden in the bill and you don’t see any of the Governor’s supports wanting to talk about the effects of the Gross Receipts tax will have on the economy and why the only people a loud to talk before the State Senate are supports of the Governor’s bill. If the Governor really thinks that his programs will significant benefits for the state, then so be it, tell the public that, but also tell them that they will be paying the cost of most of the Gross Receipts tax and be up front about its negative effects on the State’s economy. Let the chips fall were they may.

Shooting and Taxes

The since yesterday the new has been rightly dominated by Virginia Tech massacre and right for so. I would hope that both politicians and media personality would let some time bases before they starting using this incident to push their agendas. Give the families time to grieve in private and give time for all of the information to get out to the public before we make any knee jerk reactions. One of the beauties of the colleges and universities in the United States are how open they are, it makes for easier free flow of communication and integration of the university and student body into the surrounding community. Massacres like these are incredible rare and the odds of any person being killed by one is very small, you the reader probably have a higher chance of being killed by a car slamming into your house, office or apartment while reading this. It would be a shame if we damage our communities by fencing off and putting metal detectors and visible armed guard around campuses.

Today is tax day and most everyone hated the income tax because in part it is a visible tax, everyone can see it and know exactly how much they are paying to the government. The Gross Receipts Tax on the other hand is an invisible tax because the cost of the tax become incorporated in the price of goods and services sold, so unless the public does some research they do not know how much paying to the government. That is probably one of the reason that the Governor wants a Gross Receipts Tax, because that way he can claim that he is not taxing the public and blame any price increases on greedy businesses. Wednesday April 18 there is going to be a lobbying day in Springfield against the Gross Receipts tax, I would encourage everyone to attend.

A Gross Receipts Tax is Progressive

The support of the Gross Receipts tax have argued that is most fair and progressive way to fund expanded State Government spending. Ignoring for the moment whether or not Illinois needs more government spending lets look at this claim. A tax is progressive when a person or business that has higher income either pays a higher percentage of their income under the tax or at least pays more money in raw terms. Under the income tax even with a flat rate people with higher incomes pay more in raw terms, if the rate is 3 percent some one that makes 20,000 dollars would pay 600 dollars in tax, some one that makes 50,000 dollar , 1,500 dollars in tax and some that makes $100,000 would have a tax bill of $3,000 for example. The Gross Receipt Tax is based off a companies revenues regardless of how much of profit they earn, in the business world profit is corporate income, so companies that have the same revenue stream but wildly different profit margins because of the industries they operate in would pay the same in taxes. The company with the lower profit margin would see a higher percentage of their income going to Government to pay taxes. For example the maximum rate for service industries is about 2 percent, so let say you have two companies, one a restaurant and the other business consultancy, both have revenues of 10 million dollars, but the restaurant makes a profit of 1.5 million dollars and the business consultancy makes one of 3.25 million dollars, both of these companies would pay 200,000 dollars, so the restaurant would be paying 13.34 percent of their income to the Government in the form of the tax, while the business consultancy would be paying only 6.15 of their income to the Government, so the effective tax rate as percentage of income would be much lower for the company with the higher profit margin. This is not progressive.

In reality a lot if not all of this tax will be passed on to the consumer in the form of higher prices for every good and service sold in the state. This will have a large impact on lower income consumers that spend all of their income on goods and service and have lesser effect on middle and upper-income consumers that save a percentage of their income. If the Gross Receipts tax raises the price of all goods and service in the state by one percent, which could well be an underestimate, so a low income consumer will see one percent more of their income going to the state in the form of an indirect tax, for example some one that earns $20,000 dollars a year would be paying 200 dollars more in indirect taxes to the state and their effective income would be decline by 1 percent. While on the other hand some one that earns 50,000 dollars a year but saves $10,000 a year would be paying additional 400 dollars because of the Gross Receipts tax a year, but would see their income reduced by only .8 percent because they saved a portion of their income. Some one that earn 200,000 dollars a year and saves 50,000 dollars would be paying 1500 dollars year, but would see their effective income reduced be only .75 percent a year. Since the richer people are the higher percentage of their income they save, the higher income groups will see their income reduced by less than lower income groups. This is regressive and exacts same as the sales tax, the only difference is the sale tax is visible to everyone when they buy something and the Gross Receipt tax will be hidden.

Local Effects of the Gross Recpits Tax

Sunday’s Peoria Journal Star had a nice article about the recovery of Keystone, for those of you that do not know Keystone is a steel maker in the Peoria and provides many good paying manual labor jobs to the area. A few years ago Keystone entered bankruptcy and say the price of their stock decline to 2 dollars share, since then the company has made a strong recovery with help from their employee’s union and a loan for Peoria country, the company’s revenues has grown, there stock price risen to 25.48 as of Friday March 30^th and they have even entered into agreement to buy Calumetals, which is one of the remnants of the now defunct Calumet Steel. In a time when we hear a lot about decline manufacturing jobs and how American Steel companies are struggling to compete, Keystone is building themselves a nice little success story. One has to wonder how well Keystone’s story will continue if Governor Blagojevich get his way and Illinois enacts a Gross Receipts Tax, this tax would drive up their cost of doing business and make their products more expensive, which in turn would make Keystone less competitive compared to companies based in other states and countries.

Ultimately what all of this would mean would be that Keystone would become less profitable, which means that they would have less money to invest in expanded and that would be less attractive for investor to loan them money for new investment or buy their stock. The end result of less investment by Keystone means that they will be fewer new jobs created and the possibility of jobs cuts and if hurts Keystone ability to compete enough they might even end up in the same situation they were in a few years back.

A new poll done by the Public Opinion Strategies company found by a margin of 54 to 34 percent, voters believe that the Governor is breaking his campaign pledge not to raise taxes.

Will Nothing Get Done in Springfield this Summer

There are now rumors that nothing will get done in Springfield this summer as the Governor will refuse to sign any bills until he gets his proposed tax and spending increases. What this means is that all of the issues that are pressing the state, the under funded state pension that threatens to destroy the state finances in the long run, education reform, property taxes, needed improvements to the State’s capital infrastructure, ect, might not get addressed. If the rumors are true this means that Governor Blagojevich is willing to hold the future of the State of Illinois hostage unless the State Legislator gives into him on a massive tax increase that is oppose by not just Republican and Business groups, but by leading Democrats, including his own Lt. Governor, consumer and urban groups. The voters need to put pressure on Governor Blagojevich to drop his planned massive tax increase and work with the Democratic and Republican leaders in the State House to pass a budget that controls spending, cuts back on unneeded programs and pork, fixes the State Pension System and improves funding for capital project and other needed programs.

A Golden Opportunity for the Illinos Republican Part

The Gross Receipts Tax debate has handed the Republican Party a golden opportunity to turn around it fortunes in Illinois. More likely than not the Gross Receipts Tax is going to go down in flames, but the Illinois Republican Party needs to play it right. First of all they need to come up with alternative proposal to fix the State’s financial woes that focus on spending controls and smart pro-economic growth polices. Along with that they need to present policies to reform the State education systems, even thou there is little chance of anything that is put foreword by the Illinois GOP passing, it will help to show that they can lead were Governor Blagojevich and Illinois State Senate President Emilio Jones can not.

Next they work hard with Democrats that oppose the Gross Receipts Tax and make sure everyone knows that it is a bi-partisan effort and that when the Illinois Republican Party come back to power they can and will be willing to working with the other side. Secondly as much as we focus on the negative effects that the Governor’s Tax increases will have on businesses, we need to also focus on the negative effects on the consumers. One of the main points that needs to be made is that it will raise the cost of everything people buy and that because the poor spend most of, if not all of, their income on goods and services they will see the percentage of their income that goes to taxes raised by the most. That slower economic growth means fewer new and better paying jobs in the states, which makes it harder for the poor to work their way out of poverty. It needs to made a matter of businesses, consumers and the poor and how it will hurt them all.

More Oppotion to the Governor's Tax Hike and the Payroll Tax

There is more opposition coming out against the Governor’s tax increase, with Lt. Governor Pat Quinn, Comptroller Dan Hynes and State Treasurer Alexi Giannoulias have all come out against the tax increase, what makes this interesting is that they are all Democrats and that the Democratic Majority leader of the Illinois State House of Representatives has also made negative comments about the Governor’s plan. So it seems that Governor Blagojevich can not even get the leaders of his own party to sign on to his tax hike.

The other part of the Governor’s tax increase that has been largely ignored by the attention that Gross Receipts Tax has gotten is his call for a 3% payroll tax. A payroll tax is a tax that is placed on companies based on the number of employees they have and how much they pay those employees. So under the Governor’s tax, a company would have to pay 3% of the salaries of each employee they have to the State Government. This tax like the Gross Receipts tax would be bad for the states economy as a whole and bad for workers. The payroll tax comes an extra cost that is add to business when they higher more employees, so the cost of an employee that has a salary of 60,000 dollars a year would be $61800 a year, the cost of the salary plus the tax, assuming everything else is held constant. In reality part of the tax will end up being paid by the companies employees throe lower salaries, for example that 60,000 dollar a year employee might end up being paid only $59100 a year if half the cost of the tax is passed on to the employees. By raising the cost of hiring workers, this tax would lead to fewer new jobs being produced in the state of Illinois each year as labor would become more expensive. For example if a company has a hundred employees with the average salary of 40,000 dollar a years and assuming they pay half the cost of the tax, or 1.5, that company would end up paying 60,000 dollars a year in payroll taxes, or more than the price of one more employee. A company with the same features but with a 1000 employees would pay $600,000, or enough money to pay 15 new employees.

The True cost of the Governor's Tax Increase

Today the Tax Payers Foundation released an estimate that the Governor’s Gross Receipt tax and payroll tax would eat up 1.3 percent of the states economy or over 7 billion dollars, this is actually an underestimate of the taxes true cost. To estimate the true cost of the tax you have to take into account its deadweight effect, deadweight loss is something that a lot of non-economist have a hard time understanding. Deadweight loss is the loss in economic activity, benefit, which is caused by something that restricts the market place, be it a tax, trade barriers, monopolies, ect. The way that a tax causes a deadweight loss is that when the government takes money out of the economy in the form the tax, there is a loss of economic activity in two ways, first part of it loss to overheard and the other part is loss from a direct decrease in economic activity. When the government takes money out of the economy consumers and businesses have less money with which to purchase goods and services and to save. If people and business are buying less that means other business will see their revenues decrease, which means that those companies will have less money to invest in expanded production capacity and will higher fewer new employees. If people and businesses have less money to save that will else cut down on investment and economic growth. Most economic estimates put the deadweight loss as between 60%-100% of the total value of the tax, so the real cost to the State of Illinois economy from the Gross Receipts and Payroll tax is not 7 billion dollars but 11.26-14 billion dollars a year or 2.08%-2.6.2% of the state of Illinois Gross State Product. In the long run this cost compounds, for example Illinois GSP is about 538 billion and assuming a 3% year rate of growth the state economy would be 554 in 2008, 570 in 2009, 587 in 2010 and 605 in 2011 with out the Governor’s tax increase, with it the state GSP would be, using the low end estimate for the loss to the state economy, 542 in 2008, 547 in 2009, 552 in 2010 and 557 in 2011. So over 4 years the Governor’s tax increase would take about 48 billion dollars out of the Illinois economy. While this is a simplistic estimate it does a good of showing the effect that this could have on our state.