May 19, 2017

OPINION – Crain’s Chicago Business

What Illinois should learn from California

From his State of the State address to remarks he’s made on recent speaking tours, Gov. Bruce Rauner keeps invoking Silicon Valley as an enticing vision. Illinois’ two biggest obstacles to getting there? According to Rauner’s speech in Springfield on May 2, for small business they are property taxes and workers compensation, both of which are too high. California’s example is instructive, but not in the way Rauner would have us believe.

Californians once had a very familiar despair about structural, perpetual deficits. A decade ago, they too endured furloughs, payments backlogs, teacher layoffs, and steep tuition hikes. Yet since 2013, California’s budget has been in balance. What happened? Gov. Jerry Brown used higher progressive income taxes at the top end to make up the shortfall. Proposition 30 took California’s top income tax rate from 10 percent to 13.3 percent. By 2014, just 1 percent of filers paid over half of California’s income taxes, according to California’s Franchise Tax Board. And yet the state’s entrepreneurship rolls on, making the rest of us jealous.

California backed into this revenue model by accident. It had a property-tax-driven model until 1979’s Proposition 13 cut property taxes by more than half, and essentially froze rates in place. Afterwards, California had little choice but to use income taxes for revenues, and to fund schools mostly through state coffers. Illinois operates at the other end of the spectrum. State school funding comes dead last in the U.S. because of our low, flat income tax rate of 3.75 percent; localities make up the difference through very high property taxes. This is highly regressive, especially in communities like Chicago’s south suburbs, where housing prices never recovered from the recession and property levies often exceed 5 percent of a home’s value. If we had higher, progressive taxes (which does require a state constitutional amendment) and increased funding to local schools, property levies would fall and stop the ongoing regressive, negative feedback loop.