Illinois Gov. J.B. Pritzker's executive order requires us to "stay at home" and "to close non-essential businesses." So how is the coronavirus going to affect the tax collections and revenues of Illinois and its political subdivisions?
We can look at what happened to state and local revenues during the Great Depression for a parallel. The National Conference of State Legislatures, in a paper titled "State Finance in the Great Depression" (Ronald Snell, 2009), tells what happened to state revenues then.
The Depression quickly affected state and local revenues. Unlike now, in 1927, two-thirds of all state and local government revenues came from property taxes: 20% of state revenues; 82% of local government revenue. For states then, the only comparable revenue source was the motor fuel tax.
Nationwide, the "assessed valuations" of real estate fell from 1929 through 1936. They then began to rise — slowly. Nationwide, assessments dropped 20%; in Illinois, 40%. Property tax collections fell. Local government property tax collections did not reach 1927 levels until 1944. For states, not until 1952.
Consequently, property tax collections fell for state and local governments. State collections in 1932 were 11% below the 1927 level. They fell another 30% by 1936. Local tax collections fell less abruptly, but 1934 collections were 13% below the 1927 level. State collections fell more sharply because of their base in corporate and utility properties.
Initially, the state and local government response was to continue spending at approximately the level of spending in previous years. Shortfalls were balanced by a small increase in federal aid to the states, continued growth in motor fuel taxes and borrowing. In 1932, gross revenues from all sources and spending were similar in amount and purpose to what they had been in 1927 — for both state and local governments.
Then came the deluge. Rapid growth in unemployment posed new demands for public assistance that state and local governments were unprepared to meet. In 1927, the states' direct spending on public welfare ("relief") was $40 million, or about 3% of their general spending. Local governments spent $111 million, less than 2% of general expenditures. Prior to the Depression, assistance to low income and destitute people was not a governmental priority. That was largely left to private charities. But simultaneous agricultural and urban industrial unemployment soon overwhelmed both private and public sources of public assistance.
State and local governments increased spending on public assistance programs during the Hoover administration (1929-1933). State spending grew to $74 million in 1932. Local spending more than tripled from 1927 to 1932, rising to $370 million. (This was nearly 6% of general spending). But these efforts were insufficient.
That being so, an early initiative of the Roosevelt administration was enactment of the Federal Emergency Relief Act in May 1933. The act provided for $500 million in grants to state governments (at a time when a million dollars was still a lot of money), in order to "aid in meeting the costs of furnishing relief and work relief and in relieving the hardship and suffering caused by unemployment in the form of money, service, materials, and/or commodities to provide the necessities of life to persons in need as a result of the present emergency..."
During the Great Depression two-thirds of all state and local revenues came from property taxes. Today, 56% of the revenue collected by Illinois comes from income taxes, 34% from sales taxes and the remaining 10% from other sources, such as excise taxes.
So what happens when all "non-essential businesses" shut down? Closed businesses collect no sales taxes. And if they are corporations and have no income, they pay no corporate income taxes.
This week it was reported that almost 17 million Americans had filed jobless claims over the past few weeks, including nearly 500,000 Illinois residents. If people have no income, they pay no individual state income tax.
For fiscal year 2020, Illinois is spending $18 billion on healthcare, $15 billion on pensions, $9 billion on education, $7 billion on welfare and $5 billion on interest. During this shut down, those costs aren't decreasing. Expect healthcare and welfare to increase. No income and no sales means no taxes. And Illinois, unlike the federal government, cannot print money.
If 500,000 people earning a minimum wage of $600 per week are out of work for a week, that's $300 million of lost taxable income. At 5%, that's a $15 million weekly loss to Illinois. Add to that weekly corporate income tax and sales tax losses.
Illinois, as of March 22, had a $7.5 billion backlog of unpaid bills and additional underfunded pension obligations. Diminished tax revenues will make things worse.
It's not hard to see why President Trump aspires to re-open businesses.
This piece was published originally in the Moline Dispatch and Rock Island Argus on April 10, 2020
Copyright 2020, John Donald O'Shea
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