Data Points | COVID-19 Lesson: We Need Fairer Tax Policies

June 24, 2020 / Blogs

We can no longer beat the same drum when it comes to fiscal policy. If we want a vibrant region and solvent state post COVID-19, we need to challenge long-entrenched narratives about taxation and spending.

Chicago is in desperate trouble. People will flee in droves. No one will choose to live or invest here. Capital and people will flee to the suburbs. Or maybe just cities in other states. Probably suburbs too. But not Chicago-area suburbs. Everyone will flee Illinois in general. Taxes are just too high in Illinois. They will flee to Indiana. Yes, Indiana. And Wisconsin too. Our only hope is to drastically cut taxes.

Between 2007 and 2009, Illinois state revenues fell by 8% because of widespread unemployment during the Great Recession. But revenues fell by double that percentage from 2015 to 2017, after state tax cuts.

If a dollar was placed into the state coffers every time these narratives were written, Illinois’ daunting budget deficit might look much different. This was the case before the pandemic, and we are going to hear them even more as a result of the pandemic. But the notion that taxes are driving people out is an unproven hypothesis that is often accepted as fact–and it serves the most wealthy and powerful interests at the expense of vulnerable populations. It is true that migration out of Illinois has outpaced migration in over the past decade. It is true that Chicago has also lost population. But it is low-income people of color who continue to be pushed out in larger numbers, and if we have learned anything over the last month, we have learned that it all flows from structural racism: Investment for some communities. Policing and punishment for others. This is our core challenge, not taxes for top earners. Our state is one of the most regressive in the entire country in terms of who bears the financial burden. The lowest-income households pay a larger share of income to state and local taxes than top income earners. More low-income earners have left the state. How long are we going to ignore this when we talk about tax rates for a small number of high-income earners, and a supposed Indiana migration?

No doubt about it—Chicago, its suburbs, municipalities across the state, and the state itself are in the midst of a still evolving fiscal crisis. Government revenues are taking a big hit and there is no easy fix. We can expect to hear the same old grumbling about the dangers of raising taxes on high-income earners, and how government spending is the problem. But protests in cities across the country are showing us that people are no longer going to accept the status quo when it comes to structural racism and inequity. The same goes for status quo fiscal policies that serve the interest of wealthy investors rather than middle and low-income households. If we want a vibrant region and solvent state post COVID-19, we need to challenge long-entrenched narratives about taxation and spending.

The federal government should provide more support for cities and states. It has prioritized corporations and wealthy investors instead.

It is low-income people of color who continue to be pushed out. And that has everything to do with structural racism.

Mayor Lightfoot announced over a month ago that the expected budget shortfall due to COVID-19 would be at least $700 million. Similarly, the most recent projections show the State of Illinois will be facing a $7.4 billion budget shortfall in FY 2021 ($6.2 billion with a graduated income tax) as a result of the pandemic. The federal government should move swiftly to help shore up state budget shortfalls, which, across the U.S., are projected to be at least $650 billion over the next three years. That may seem like a huge amount, but it pales in comparison to the COVID-19 relief measures the federal government has approved so far ($3.6 trillion). Unfortunately, political fault lines have been drawn around such a move, with opponents decrying the moral hazards of incentivizing bad fiscal behavior by bailing out cash-strapped governments.

Interestingly, such narratives were scarcely uttered when the Federal Reserve signaled that it would purchase over $4 trillion in corporate debt, whether it was good debt or bad debt. There was no outrage over moral hazard. No criteria to assess whether recipients had been fiscally responsible. Since then, at least 49 large companies have benefitted from bond sales of nearly $200 billion. There are no requirements for companies on how to use this capital. No employee protection provisions. No stipulations not to use money raised to buy back their own shares. No reporting requirements.

Similarly, the CARES Act, which provided stimulus checks to households for up to $1,200, included nearly as much stimulus in the form of tax breaks for the wealthiest investors as it did in payments to workers. The message is clear: accountability when it comes to funds for governments, but no accountability when it comes to wealthy investors and corporations.

Time for a change in what and who we center in policy responses

Structural racism means investment for some communities. Policing and punishment for others.

It is unlikely that federal support is coming any time soon to help with budget shortfalls across our region and our state. This leaves cities and the state to solve fiscal challenges on their own, which means making hard choices about essential supports that low-income households rely on. The pandemic has yet again revealed how our policies center the narratives of the powerful at the expense of the vulnerable. Going into the autumn, we will continue to hear, for example, how we must prioritize austerity to appease investors, and how a fairer income tax structure will only drive high income earners out of state. When we hear this inevitable chatter, we must consider an important lesson from the past. Between 2007 and 2009, Illinois state revenues fell by 8.7% because of widespread unemployment during the Great Recession, but revenues fell by double that percentage (16.7%) from 2015 to 2017 right after state tax cuts were enacted. Between 2015 and 2018, we also saw a spike in the gap between migration out and migration into Illinois. We wouldn’t expect to see this among high-income earners (we did) if income taxes were such a motivating factor in mobility decisions. These tax cuts did not come with any guarantee that they would create jobs for Illinois residents. They came at the expense of investments in human and community development. They came at the expense of poor households, and particularly poor households of color.

Illinois is one of the most regressive states in the country in terms of taxes: The lowest-income households pay a larger share of income than top earners.

People have been pushed out of the region—out of Chicago to other places, including Indiana and Wisconsin. But those people pushed out were disproportionately poor Black households, not the wealthiest earners. This is what happens when policies don’t prioritize equity. One example: each year, the State of Illinois spends approximately $1.5 billion on corrections. This is an investment in displacing residents of largely Black and Brown communities in the Chicago region into prisons downstate. The historical rise in the Black unemployment rate has coincided with the historical rise of incarceration rates. This is not a coincidence. Black households in general have also been pushed out of Chicago to outer-ring suburbs and nearby towns in bordering states.

These trends of displacement is not true, however, of the wealthiest households, many of whom move out of the city or state due to retirement, for example. This is what structural racism does. It perpetuates narratives that uphold the status quo for wealthy and powerful interests. But the protests throughout the country are telling us that the status quo will not hold any longer.

Will we listen, and center equity in our fiscal policies—fairer taxation, shifting funds away from policing and punishment, and deeper investments in the long-term wellbeing of low-income and Black and Brown communities? It’s our civic duty to embrace such an approach.