Budget Deficits and Taxes

Today I'm writing my own personal statement about taxes. This isn't a student paper.

I'm concerned about the state's budget deficit. Some journalists (including Rich Miller) are reporting that Illinois has a $12 billion dollar deficit for the state budget in the upcoming fiscal year. Evidently there are some representatives in the Illinois General Assembly who aren't interested in solving this problem. Generally, such deficit problems can be solved by raising revenue (hard to do during a recession) and cutting spending (which tends to reduce stimulation of the economy, and is unpleasant to do in a recession). Budget cuts will most be unpopular, and raising additional revenue (raising taxes) will also be unpopular.

This got me to think about some other large states like Illinois and their budget problems. Here is a list of states, followed by their populations (estimated from summer of 2007), their likely state budget deficits in the upcoming fiscal year (taken from newspaper articles published in May of 2009 in the states reporting on state politics and budget problems), and an estimate of the total state budget deficit expressed as a per-capita estimate. Finally, I've included a taxation index, which is my estimate of the total property tax, sales tax, and income tax burden in the state experienced by median income households as a percent of the highest tax burden (California's, which is set to 100%).

California: 36.8 million residents, $21.3 billion deficit, $580 per person, and 100% tax burden.
Texas: 24.3 million residents, $0 deficit, $0 per person, and a 38% tax burden.
New York: 19.5 million residents, $6 billion deficit, $310 per person, and an 83% tax burden.
Florida: 18.3 million residents, $3.4 billion deficit, $186 per person, and a 27% tax burden.
Illinois: 12.9 million residents, $12 billion deficit, $930 per person, and a 61% tax burden.
Pennsylvania: 12.5 million residents, $3 billion deficit, $241 per person, and a 49% tax burden.
Ohio: 11.5 million residents, $3 billion deficit, $261 per person, and a 55% tax burden.
Michigan: 10 million residents, $1.7 billion deficit, $170 per person, and a 62% tax burden.
Georgia: 9.7 million residents, $800 million deficit, $83 per person, and a 62% tax burden.

A couple things grab my attention as I look at these nine largest states. First of all, Texas has a very small state tax burden, and it also has no deficit. So, I suppose Texas must spend far less per person than the other states on this list (although Florida has an even lower tax rate and might spend even less). Is Texas considerably worse in some ways than California and New York because of its low spending? That is, are hospitals, schools, police, roads, and state services far better in California and New York than they are in Texas and Florida? How do poor persons, the unemployed, the chronically mentally ill, and the disabled fare in New York and California compared to Texas and Florida? I'm interested in knowing how Texas keeps its budget balanced while its taxes are so low.

Secondly, I'm impressed that Illinois has the largest state budget deficit (expressed as a per-capita deficit) in the nation (comparing the large states). California is in the news because they have the largest deficit, nearly twice as big as the Illinois deficit, but California has nearly three times as many people as Illinois, so their deficit is actually smaller when expressed as a ratio to the number of people in the state.

Third, I'm interested in the variation in taxes. I calculated the tax burdens by estimating what a resident household would pay in state property taxes if they lived in a median value home, what they would pay in income taxes if they were a two-adult and two-children married-filing-jointly family earning $50,0000, and what they would pay in sales taxes if they spent 30% of the median state household income on things that were taxed at the state sales tax rate. Then, taking the sum of these raw dollar amounts, I converted them into percents of what the highest-taxed household (in California) would pay. I imagined that after combining sales taxes, income taxes, and property taxes, all the states would be close to each other, with "low-tax" states perhaps taxing about a third less than the "high-tax" states. But, it seems Florida taxes at about a quarter what California taxes people. I also thought my state (Illinois is where I live, although I'm a native Californian) would be a "high tax" state, but I see we only tax at about the same as Georgia and Michigan, which is more than a third less than California.

Looking at my raw dollars of household taxes estimated and the per-capita state budget deficit, I am able to calculate how many dollars more my median household would have to pay to cover the budget deficit. My calculations were that my median Illinois household of four persons would be paying about $5,400 in taxes. (My four-person household paid about $5,500 in such taxes last year, and we make about the median Illinois household income, but that's about $20,000 less than the median Illinois four-person family income, so perhaps my estimates are off and I'm underestimating tax burdens in Illinois, but the source of the difference could be that in my taxes I'm looking at both state and local taxes, and for this exercise I'm trying to just look at state taxes and ignore the extra couple percents of household income that might go to local government). If the median four-person household is paying $5,400 in taxes to the state, and our deficit is about $900 per person, that means you would need to raise taxes on that four-person household by about $3,700, up to $9,100 in total for the household, to cover the state's $12 billion deficit.

If Illinois did have tax rates that high we would be at 111% of the current Californian tax burden. But, I guess California needs to raise its taxes as well (by about $2,000, up from $8,600 per four-person median income household to $10,600 per four-person median income household.

Median incomes for four-person family households in California are about $71,000, so is it fair for families like that to pay a total of about $10,000 to $11,000 in their taxes to support all the California state government services? The median four-person family incomes in Illinois are about $73,000 (over $20,000 more than my household earns in a year). Is it appropriate for families in that situation to pay over $9,000 to the state for Illinois state services?

A common argument (and it's supported by some research) is that if taxes are too high, businesses and hard-working, intelligent people will move to states (or countries) with lower taxes. I suppose that if I had a choice between two states that provided about equal quality and quantity of government services, and one was asking me to pay a total of $11,000 per year in taxes (combined income, sales, property, etc.) and the other was letting me pay $6,000 per year, I would seriously consider moving to the lower-taxing state. But, if the state charging me $11,000 had much better schools and universities, lower crime, no homelessness, low unemployment, excellent roads, fine libraries, and fantastic parks, etc., while the low tax state was generally inferior in every type of government service, then I might be satisifed to pay the extra $5,000 per year to live in the state that gave me value for my tax dollars. If the difference was only $1,000 per year in taxes, I don't think I'd notice and I don't think the taxation difference would have any influence on my decision about where to live. After all I have roots in states where I have lived and worked, and I have preferences in climate, politics, geographical region, and culture that determine where I want to live with greater influence than considerations about taxation.

I suppose after all this consideration, I do hope Illinois increases its taxes, and I hope this covers our budget deficit. Governor Pat Quinn is suggesting a 50% increase in our income tax, from 3% of adjusted gross income remaining after deductions to 4.5% of the same income remainder after deductions. I know there might be a few dozens of millions of dollars the state could cut here and there, but we can't cut a billion dollars, let alone 12 billion dollars, from the state budget, and I'd be glad to pay 1.5% of my household income more than I do now to keep the state's roads, schools, mental health clinics, hospitals, parks, courts, jails, universities, and police & fire stations open and functioning well. I'm upset that representatives in the general assembly won't vote to increase our taxes and cover the budget deficit.