06/11/2012 04:44 pm ET Updated Aug 11, 2012

Budget Cuts Are Not the Answer

In the great debate at the end of Illinois' legislative session over Medicaid and pension reform, editorials raged against "runaway" spending from profligate programs. Yet the familiar story of how these programs and obligations are ostensibly creating a huge budget gap, which is serious at nearly $11 billion, is missing several essential facts: Illinois revenue collection is out-of-date and its spending is not the source of the problem.

The Medicaid cuts agreed to are dramatic. More than $1.6 billion will be cut from Illinois' $14 billion Medicaid budget. This will have a dramatic impact on the poor, the disabled, senior citizens and those in the medical field (as Medicaid reimbursement rates to hospitals and nursing homes will also be affected). Pension reform wasn't as successful in gutting payments, as there was disagreement over how much local towns and cities should contribute to public pensions.

Bitten by the austerity bug, our representatives in Springfield not only made the hasty decision to gut Medicaid but will being doing the same to social services with its fiscal year 2013 budget, which also passed in the waning days of the session. The proposed budget is set to cut human services funding by more than $300 million. The impact of the passed budget is still being crunched. Many dollars for those in need, including children, are likely to be reduced.

The elderly, the disabled and those with low income will be impacted as well. As a part of the Medicaid reform bill, Illinois Cares Rx will be gone by July 1. So will the Family Care program. Hundreds of thousands of poor senior citizens and people with disabilities rely on Illinois Cares Rx, which supplements payments for prescription drugs, and Medicare Part D will not be able to fully fill in the gaps if people don't qualify. Likewise, Family Care gave health insurance to families living above Medicaid eligibility but under 185 percent of the federal poverty level. Thousands will lose coverage.

Yet the very move to cut Medicaid or pension payments stems from a misconstrued understanding of what ails the Illinois budget. It is caught up in the austerity hysteria that is in vogue from the U.S. to Europe, the idea that cuts alone can right budgets and inspire confidence. Specifically in Illinois, the solution to the budget deficit and paying down pension liability is to explore other means of revenue collection to keep pace with similar sized states.

Illinois cannot wholly be blamed for its poor system of collection. The increased competition among states to maintain businesses has induced Illinois to give away ludicrously large tax breaks, such as the $250 million per year package offered to the Chicago Mercantile Exchange and Sears to prevent them from leaving the state. But legislators and the governor didn't feel the pressure of competition with neighboring states in slashing the budget. It was the austerity craze that served as the impetus. This destructive meme must be replaced with one that is not penny wise and pound foolish. Many of the cuts today will cause problems in the future.

Indeed, by slashing Medicaid as much as they did, Illinois legislators will lose a considerable advantage they had in funding from the federal government. Illinois receives 50 to 60 percent of its Medicaid dollars from Washington due to a matching funds scheme. Essentially, Illinois is going to be missing twice as much as reported.

All the cuts would make sense if these parts of the budget were bloated, but according to Yerik Kaslow, of the Center for Tax and Budget Accountability (CTBA), overall funding for human services has declined dramatically. In budget analyses performed by the CTBA, the group found that both the House and Governor's budget proposals would fund human services in 2013 by $2 billion less than its level in 2000 when adjusted for inflation and population growth. "And when you compare that to the other major categories of Illinois' budget, being education, both K-12 and higher education, healthcare, which is primarily Medicaid, human services and public safety, human services had been cut (considerably)," Kaslow said. The only comparable cut has been to public safety, which received a larger percentage cut but is a much smaller part of the budget.

Similarly, it might make sense to rein in spending if we were spending too much. But for a state as large as Illinois, it is in the bottom half in per-capita spending, 15th from the bottom. Our ranking could be even lower if the state were not making large payments into the pension system. With Illinois 22nd from the bottom in per-capita state collections, it is revenue collection that must change. "The structure of Illinois' revenue system does not keep pace in terms of being the fifth biggest state in GDP and population," Kaslow said. Kaslow pointed to Illinois' flat income tax and scant taxes on financial and insurance transactions as areas ripe for change. Financial and insurance income is taxed but transactions are not, which could be a huge area for resources with Chicago's large financial and commodities exchange businesses.

On pensions, Kaslow recognized that pension liability was negatively affecting Illinois' credit rating and ability to borrow money. Kaslow's colleague at CTBA, Amanda Kass, noted that insufficient state funding is the largest contributor to our pension liability. In the '90s, when Illinois only had $17 billion in liabilities and came up with a plan to tackle the problem, underfunding contributed to 50 percent of the liability. Today underfunding is still the number one contributor to liability, but contributes to 43 percent of it. There hasn't been much progress. "With all the legislation that they've put out, it's all based on trying to reduce COLA (cost of living adjustments) for current employees and current retirees. It looks like they're trying to reduce benefits... Even if they won a lawsuit (to reduce benefits), and were able to implement those changes, I'm not sure it wipes out on the state side the fiscal obligations it puts on the budget because they're not fixing the revenue stream portion of it."

The phenomenon of cutting costs and human services is not restricted to the state level. Chicago Mayor Rahm Emanuel is adamant about closing down public health clinics. And in Washington, the Republicans' budget proposal would preserve funding for the Pentagon over social services. Yet careful economists recognize that lack of tax revenues in the past decade are a major reason for the budget deficit and national debt. Spending levels per capita are down nationally after the stimulus ran out, so now is not the time to cut there either.

It might appear that Illinois is just another spendthrift in a nation of spendthrifts (in a world of spendthrifts). But beyond the rhetoric, which appears everywhere, the numbers don't lie. It's not a spending problem. It's a revenue problem.