Closing Six Tax Loopholes Could Eliminate 74% of Illinois Pension Under-Funding

1. Closing Six Tax Loopholes Could Eliminate 74% of Illinois Pension Under-Funding Funding Strong Schools and Fair Pensions Meeting Northern Illinois Jobs With Justice January 2, 2013 East Aurora High School Auditorium, 500 Tomcat Lane, Aurora, IL Ron Baiman Chicago Political Economy Group rbaiman@cpegonline.org

2. We’re in a “Lesser Depression,” State and Federal Public Spending Need to be Increased Not Cut • The Feds should be increasing not reducing deficit spending to create jobs and increase taxes on the wealthy to support a much higher level of pre-deficit social spending. • Illinois’ for decades has been taxing the wealthy and Corporations at much too low a rate to support even it’s very low level of social spending. Both need to increase dramatically. • Illinois’ pension deficit is a state debt problem not a pension spending problem.

3. Illinois’ Structural Budget Deficit is a Result of too little Revenue not too Much Spending • Illinois overall tax share is $ 4.4 billion less than the "average" (mid-ranking or median) state relative to state income or capacity and highly regressive: Illinois has the third highest rate of overall (income, sales, and property) taxation of the lowest 20% and 12th lowest rate on the top 1% of non-elderly families among the states. • Illinois GF spending on public services (net of pensions) would have to increase by $5.9 billion as a share of state GDP to have a "median" level of spending on public services relative to its capacity. • See Baiman, Dec. 2012, New Ground #145.

4. Illinois’ Corporate Tax Rate is Lower than Wisconsin and Indiana and only 1/3 of Corps pay any CIT • The Illinois Corporate Income tax (CIT) of 7% is lower than Wisconsin (7.9%) and Indiana (8.5%) net of Personal Property Replacement taxes. A Personal Property Replacement tax is assessed in addition to the CIT in both WI and IN and as an additional 2.5% added to the CIT and passed on to local governments in IL. • Only about 10% (117,832) of Illinois establishments are C-corporations liable for corporate income tax. • Of these only 33.3% (39,212) pay any CIT, and only 367 pay over $1 M in CIT. • 2007 Economic Census and IDOR data.

5. All of the Increase in Illinois Pension Payments are Due to Actuarial Pension Debt, Not Excessive Pension Costs or Real Debt • Pension “Normal Costs” were only $1.6 B of the $ 4.1 B state pension payment in FY 2012 and only $1.6 B of the $5.1 B due in FY 2013. “Normal Costs” should be more than adequate to pay current pensions –more on this point below. • Only 11.4% of the 1996-2010 growth in unfunded pension liability is due to employee salary or benefit increases. 43% is due to falling employer contributions. • Illinois average pension in 2011 was $ 27,000 comparable (for a wealthy state) to the $23,000 average among the states. • See CGFA and CTBA pension reports.

6. Illinois State Pension Under-Funding Assumptions • 8% Investment Return • 3% Inflation • 33 year (FY 2013 – FY 2045) time horizon • June 30, 2012 estimate of the net present value of under-funding for Illinois’ five state pension systems is $ 94.6 B. • Social Security is a “pay-go” system that does not have to accumulate a fund sufficient to pay 33 years of pensions.

7. Six Illinois Tax Loopholes • CME Income Tax Reduction ($85 million) - After vigorous lobbying by CME Group, the “sales factor” used in the formula to set its corporate income tax rate was arbitrarily lowered (by 1/3rd for FY2013 and to just 27.5% thereafter), significantly reducing its tax liability. 2. Foreign Dividends ($386 million)- Currently, foreign dividends are considered taxable income under federal law, but are exempt from taxation in the State of Illinois. This would allow Illinois to tax dividends that are earned by foreign companies and are transferred to companies that have taxable income in the State of Illinois to also be subject to the Illinois income tax.

8. 3. Domestic Production Credit ($200 million)- The Domestic Production Credit is a tax credit that is awarded by the Federal Government that the State of Illinois is coupled with. What this means is that companies that have taxable income in Illinois are receiving a tax credit for activity that is taking place outside of Illinois along with their Illinois activity. If like 22 other states, Illinois decoupled, companies in Illinois would still receive the federal tax break. • Online Hotel Purchases ($25 million)- If someone purchases a hotel from a website like Priceline, the only tax that is paid is based on the rate that Priceline pays the hotel. By taxing the final price that is being paid for the hotel room, the State of Illinois can increase revenues by $25 million annually.

9. Offshore Oil Drilling ($75 million) - Oil production activities that take place in the outer continental shelf are not taxed by Illinois although many other states now tax this income that can be apportioned to their state. • Retailer’s Discount ($109 million)- Originally intended to compensate Illinois shop-owners for the costs of collecting state salestaxes in the pre-computer era, the biggest beneficiaries are now the largest out-of-state retail chains like Wal-Mart (which receives over $8 million annually.). Unlike many other states, Illinois does not cap the amount a retailer can receive for transmitting sales tax funds.

10. Total 2013 Cost: $ 880 M Based on IDOR Estimates • If those revenues were earmarked each year to pay off the state’s accrued liabilities to its 5 pension systems, and they were invested under the systems current assumptions (assumed investment return of 8%, and assumed inflation rate of 3%), and such assumptions proved to be reasonably accurate, the 2013 net present value accumulated by these funds over the next 33 years (2013 to 2045) would be be $70.5 billion. • These assumptions are roughly comparable to those used for the latest June 30, 2012, FY 2013 to FY 2045 $94.6 B CGFA estimate of the Illinois unfunded pension liability. Based on these estimates roughly 74% of Illinois’ FY2013 unfunded pension liability over the next 33 years could be paid for by closing these six corporate tax loopholes. • $ 302 M more in revenue would eliminate 100% of the FY 2013 unfunded liability.