Sales Tax Redux

The Grundy Economic Development Council and Grundy County Chamber of Commerce and Industry are hosting a meeting and presentation regarding the proposed County School Facility Tax (the proposed sales tax increase which I have previously written about here and here) at 7 p.m. on Tuesday, October 22, in the board room of the Grundy County Administration Center.  The address is 1320 Union St., Morris.  The public is welcome to attend this meeting.

The meeting will feature a presentation from representatives of Stifel, Nicolaus, an investment banking firm based in St. Louis, Missouri.  They, of course, will tell everyone that they are doing this out of the "goodness of their hearts" and have "no financial interest" in seeing a sales tax increase pass.  I find that hard to believe, when they make their money by helping school districts to float bond issuances, and there will be a lot of money to be made on those if this sales tax passes in Grundy County.  Mark my words, if the sales tax passes, and Grundy County schools float bonds based on the anticipated revenue from this sales tax, you will see Stifel, Nicolaus and their ilk collecting handsome fees from Grundy County school districts.

An additional side note:  the County School Facility Tax has been defeated twice in neighboring LaSalle County (the second time around the percentage opposed was greater than the first time around). 

Next Minooka 201 School Board Meeting

The next meeting of the Minooka CCSD 201 school board is Wednesday, July 24, 2013. The Committee of the Whole Meeting starts at 6:00 p.m. in the board room (the old library) at the Minooka Primary Center located at 305 Church Street in Minooka. The Committee of the Whole Meeting will be followed by the regular Board Meeting at 7 p.m. Both meetings are open to the public, and everyone is encouraged to attend. You can find the agenda for each of the meetings here. In addition, for those who are interested, click here and here for information regarding issues that will be discussed at the Committee of the Whole Meeting and the Board Meeting.

Why I Oppose a Sales Tax Increase for Grundy County

At a recent joint school board meeting of Grundy County school boards, the possibility of asking voters to approve a School Facility Occupation Tax for Grundy County was discussed.  For more background on this tax, see here.

As a member of the Minooka CCSD 201 school board and as a voter, I will be voting "NO" on the question of the tax increase.  Here is why:

1.  I have two children, currently attending Minooka CCSD 201 schools, who will one day be taxpayers.  I would like them to be able to afford to live in Grundy County if they so choose.  I am therefore opposed to increasing their future tax burden.  This is not a one time referendum for issuing bonds to build a school or two.  This is a permanent tax increase.  There is no provision in the statute for a county to decide that this tax is no longer needed (if it ever truly was).  So, on top of a recent 67% increase in the state income tax (from 3% to 5%), we would be piling on a 16% increase in our sales tax (from 6.25% to 7.25%).  I know many people are going to say that "this is for the children" (in fact, I have already heard this), but we should be careful what we do "for the children."  The people that are children right now are going to be taxpayers one day.  We should do everything in our power not to burden them with additional taxes.  Otherwise, they may find that it is too expensive to live in the communities in which they were raised.

2.  This would be a pure tax increase no matter what anyone would lead you to believe.  This is not swapping one form of tax for another.  It has been argued that school districts could lower their property tax levies to offset the impact of this tax.   Even if they could, that does not mean that they will.  There is no provision which requires them to lower property taxes in response to increased revenue from a sales tax.  If you think that some or even any school districts would lower their property tax levies in response to an increased sales tax, you are putting a lot of faith in school boards to look out for the interests of taxpayers.  A school board may promise to do this in order to get the voters to support the sales tax increase, but such a school board would have no legal obligation to fulfill the promise and, in any event, cannot bind a future school board (remember, the tax increase would be permanent).

3.  Voters will be giving up an enormous amount of control over spending on school facilities.  As it stands right now, school districts must come to the voters for approval to issue bonds for capital projects such as building new facilities or improving old facilities.  With this tax increase in place, the voters will be giving up the ability to control such spending.  School boards will no longer need to "sell" projects to the voters.

4.  This money will burn a hole in the pockets of many school boards.  Governments, even more than individuals, have a tendency to burn through any money that they can get their hands on.  If there is no pressing need to spend and they have money, they spend on what are arguably wasteful projects.  Right now, many school districts are feeling the pain of the recession (which brought about falling property tax revenues) and are looking for a way to raise more money.  Rather than cutting back on spending to make it through the rough patch, they want to increase revenue.  Once we get through this rough patch, however, they will still be collecting money through this tax, even though they will no longer need the revenue.  Again, this tax is permanent.  You will be paying the tax whether the school districts need it or not.  And it can only be spent on school facilities.

5.  The revenue from any potential tax increase can only be spent on school facilities.  It can not be spent "in the classroom."  Some school districts in Grundy County may need new facilities now or in the future.  This tax would be collected on behalf of all the school districts in Grundy County whether they need new facilities or not.  Let those school districts that have a need for new or improved facilities ask the voters of their districts for approval to issue bonds to fund such projects.  That way, taxpayers in those districts that don't have such a need will not have an additional tax burden.

6.  A sales tax is the most regressive form of taxation.  That is, it has the most impact on those who are least able to pay the tax.  Everyone who buys goods in the county will see their sales taxes increase.

7.  There has been some talk about how many people who are not residents of Grundy County will pay this sales tax.  Well, I doubt that the percentage of such people is very high compared to those of us that live and shop in Grundy County.  So, I doubt that there will be much of a subsidy from non-residents.  But, even if there were, how is it fair to try to shift the financial burden of educating our children to others?

 

Does Your Superintendent and School Board Want to Increase Your Sales Tax?

A little known provision of Illinois law, called the School Facility Occupation Tax (see here for the text of the law), allows the school boards representing more than 50% of the student enrollment in a county to place a question on the ballot at the next election to raise the sales tax in the county up to 1%.  The proceeds from such sales tax must be used for school facilities and are allocated to the schools based on student enrollment.

In the recent election on April 9th, voters approved the sales tax increase in 6 of 17 counties and rejected the sales tax increase in 11 of 17 counties.  Across the state, the School Facility Occupation Tax has been approved in 17 of the 102 counties.

Grundy County voters may be asked to vote on the School Facility Occupation Tax in the next election.  Grundy County superintendents and school boards are already looking into the possibility of gaining additional school revenues through such a sales tax increase.  A number of school boards have been privy to presentations by Stifel, Nicolaus, an investment banking firm that specializes in bond financing, regarding the increased revenues available from a sales tax increase, the procedure for getting such a question on the ballot, and the keys to a successful vote.*  See here for the presentation to the Finance Committee of Minooka CCSD 201 (Stifel's presentation begins on page 12 of 47).

A joint school board meeting of Grundy County school boards has been scheduled to discuss the School Facility Occupation Tax.  The joint school board meeting will take place May 8th at 7 p.m. at the Coal City Early Childhood Center, 755 South Carbon Hill Road, Coal City, Illinois (for the meeting notice and the agenda of the meeting, see here).  The public, of course, is welcome to attend and comment.

For recent coverage regarding the sales tax increase proposal in Grundy County, see here and here.


*Stifel's angle, of course, is to place itself to receive increased advisory fees from such school districts when they issue more bonds in anticipation of the revenue represented by the increased sales tax.

Is This The Future Of Illinois?

This blog is about Minooka CCSD 201, but sometimes I post about happenings in other places in order to illustrate a point.  (Also, because the school district is affected by happenings on the state and federal level).  This is one of those times.  It seems that Harrisburg, Pennsylvania is sinking, not only financially but literally (see here).  You see, they spent money unwisely and took on too much debt.  As a result, the city is on the verge of bankruptcy and is having difficulty getting a loan.  Over the years, they neglected the maintenance of basic infrastructure like sewer and water pipes.  Now, sink holes are opening up all around the city due to the sandy soil and the leaking pipes.  The city not only neglected this maintenance but now is having trouble even making its payroll.  The State of Illinois, meanwhile, had its credit rating recently down graded (again) by one of the major rating agencies (see here), leaving Illinois with the worst credit rating of any state in the nation.  As a result, Illinois recently shelved plans to issue $500 million in bonds for school and transportation projects (see here).  Now, Illinois may eventually issue these bonds, but the state (and, therefore, ultimately the taxpayers) will end up paying more in interest on the bonds due to the state's poor credit rating.  This is a classic debt-spiral, which I have written about previously (see here and here).  Harrisburg is merely farther along down the spiral than Illinois.

So, what causes a debt-spiral and how does a state, city, school district (or nation, for that matter) avoid one (or, if it is already in one, how does it get out)?  If you boil it down to its root cause, a debt-spiral is caused when an entity (state, city, school district, etc.) refuses to live within its means.  Public sector entities are supported by taxes on the private sector (even money printing by a central bank like the Federal Reserve is ultimately a tax).  However, there is only a certain level of taxation that the taxpayers (the private sector) are willing or able to support.  It is sometimes difficult to determine what that level of taxation is for any given public sector entity since it depends on a multitude of factors.  As is all too typical, once a public sector entity starts to bump up against that level of taxation and has trouble raising current revenue it enters the debt markets and floats bonds in increasing amounts to obtain current funds in exchange for future taxation.  (Long term debt financing for necessary and prudent capital projects is one thing, but debt financing for current consumption is a clue that you have entered debt-spiral territory.)  The interest payments on these bonds, of course, just make the current problems worse and the public entity finds itself going to the debt markets with increasing frequency just to pay for current services.  (This is very much like a family that lives beyond its means and starts to use mortgage debt or a home equity loan to pay for day to day expenses.)

So, how does a public sector entity avoid a debt-spiral?  The same way that an individual or a family avoids a debt-spiral: it lives within its means.  For a public sector entity, that means that it must keep its expenses below (to be safe, well below) that level of taxation that the relevant taxpayers are willing or able to support.  This is the crux of the matter since most people spending public money do not spend such money as if they were spending their own money.  They tend to spend it much more freely.  Once a public sector entity finds itself in a debt-spiral, how does it get out?  There are really only two ways out: some form of debt restructuring (such as bankruptcy) or a bailout from a public sector entity higher up the food chain (also known as "kicking the problem upstairs").  In order to avoid going back into the debt-spiral again, the public sector entity must live within its means.

Calvin Coolidge (one of the most underrated Presidents of the United States) once stated the following:  "I favor the policy of economy, not because I wish to save money, but because I wish to save people.  The men and women of this country who toil are the ones who bear the cost of the Government.  Every dollar that we carelessly waste means that their life will be so much the more meager.  Every dollar that we prudently save means that their life will be so much the more abundant."

It's Official, Illinois on Road to Ruin

A new report has recently been published by the State Budget Crisis Task Force (apparently you need a task force to tell you what someone who is good in math could tell you).  The State Budget Crisis Task Force is co-chaired by Richard Ravitch (former Lieutenant Governor of New York) and Paul Volcker (former Chairman of the Federal Reserve Board of Governors).  Their new report on Illinois' budget crisis does not paint a pretty picture.  Some highlights from the report summary include the following statements:

"Illinois' budget is not fiscally sustainable." (p. 7)

"Illinois has the worst unfunded pension liability of any state . . . . Illinois will not be able to fund other priorities unless it adopts serious pension reform." (p. 7)

"Illinois' debt is also crowding out the budget." (p. 7)

"It would be better for Illinois to start on a long-run path to a sustainable budget than to live beyond its means for several more years and then face a sudden, painful reckoning." (p. 8)  This could also be said for our school district (in fact, I have been saying this about our school district since I was elected to the board in 2009).  But, it is in the nature of most people to seek to delay the painful reckoning until it can no longer be delayed.  By then it is so large that drastic measures are required.

A couple of other points that are mentioned later in the report:

"Financing deficits, particularly using debt as if it were an element of revenue, is bad financial and budgetary practice." (p.32)

". . .funding pensions, Medicaid, and debt service has diminished Illinois' ability to fund education." (p.37)  In other words, we have starved our future to feed our present.  Can you say "generational theft?"

To read the full report, click here.  To read a discussion of the math involved involved in the problem, click here.