May 10, 2014

History Lesson on IL Constitution, Pension Guarantee, Flat Tax

May 9, 2014. 1970 was a very important year in Illinois. That was the year the state last held a Constitutional Convention to amend the law of the land, or the state in this case. Ratified in 1870, the Amendments added one hundred years later would prove to be a curse to future generations of Illinois citizens. One woman who was there and an integral part of the 1970 Constitutional Convention recalls the details that gave us guaranteed pensions and a state flat tax.

Ann Lousin at a past pension seminar. Image courtesy of the Truth In Accounting blog.

Thursday’s edition of Reboot Illinois featured a lengthy discussion with Ann Lousin, professor at The John Marshall Law School, Chair of the Chicago Bar Association’s Constitutional Law Committee, and the 1970 research assistant for the Illinois House Revenue and Finance Committee. When the centennial Constitutional Convention took place that year, Lousin personally witnessed the events that transpired.



Only a ‘flat’ income tax

One of the curious and previously-existing Amendments to the Illinois Constitution came in 1966 when the convention passed a rule that allowed Illinois to enact an income tax, but not a ‘graduated’ tax that charged the wealthy a higher rate than the poor. It only allowed for a ‘flat’ tax which charged all residents and businesses equally. The Legislature even provided for corporations to pay a slightly higher rate than individuals, but only to a maximum which the Amendment set at an, ‘8 to 5 ratio.’

Thursday’s history report recalls how state Republicans were opposed to any Constitutional Convention, knowing the establishments of both parties would push though a state income tax, which didn’t exist at the time. And when Republican Richard Ogilvie was elected Illinois Governor in 1968, their fears proved true. The GOP Governor teamed up with the Chicago Democratic Machine, led by Chicago Mayor Richard M Daley, and strong-armed the creation of a state income tax.

The flat tax was a compromise with anti-tax Republicans from downstate and the suburbs that feared the new revenue would only be stolen by the corrupt Chicago Democrats that ruled city government. “What was in there, as I recall, was the same thing that was in the 1966 Amendments, which was the eight to five ratio and a flat-rate tax, that is to say non-graduated,” Lousin recalled, “And that seems to have been palatable for an awful lot of voters.”

With both Democratic and Republican leaders in Springfield salivating over what they could do with a windfall of new money to play with, the state income tax rate was originally set at 2.5%. At the time, even government employee pension recipients had to pay income tax like everyone else. But as Lousin explains, they were “very unfortunately” exempted from paying income tax in 1984. Another reason Lousin says Republicans signed onto the creation of the state income tax was the trade-off by which the state stopped taxing real and personal property on a graduated level. That tax was costing large businesses, corporations and the super rich a fortune in ‘wealth tax’ payments.

Professor Ann Lousin doesn’t hide the fact that she’s disheartened by some of the actions by Illinois politicians, some of them very recently. Among them is the recent Bill sponsored by State Sen. Don Harmon (D-Oak Park). It would introduce a graduated income tax rate to target the state’s wealthiest residents and businesses. But it has one element that the law professor and Chicago Bar Association executive despises - it bans local governments from ever enacting their own city or county income tax.

“What irritates me to no end is that these purists are willing to sell out the city of Chicago, the County of Cook and every other local government and school district in this state by precluding them ever, ever, ever from having an income tax,” she explains. The author’s of yesterday’s Reboot Illinois give the example of rural school districts, where property values are on poverty level, the local property tax revenues reflect that, and the local school systems funded by it suffer immeasurably.



Guaranteed golden pensions

One item that most Illinois politicians can’t seem to get through their head is that the Illinois Constitution forbids the state from ever taking away pension benefits from government employees that were agreed to by contract. But time and again, state elected officials propose and occasionally pass laws, only to have them overturned by state courts citing the state Constitution’s guarantee. How did that extremely expensive and short-sighted Amendment get into the Illinois State Constitution? Professor Ann Lousin was there in 1970 and she explains.

As it just so happens, two weeks ago Lousin gave a presentation at the University of Illinois at Chicago about Illinois’ worst in the nation government employee pension system. As she has no doubt done countless times before, Lousin quoted the section of the Illinois Constitution that specifically guarantees government employee pension benefits from ever being taken away or reduced:

‘Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.’

Ironically, it was the state’s Republicans in 1970 that were the deciding voice in favor of guaranteeing all government employee pensions for state workers and every government worker in every town, city and county. At the time, American corporations were already in their steady decline and were stripping their own companies of everything of value they could steal or sell off. One of the first casualties was their employees’ pension funds.

As the report explains, during the 1970 Illinois Constitutional Convention, state residents flooded their legislators’ offices with letters and calls describing how the pension they paid into for decades at their private employer had vanished. Sitting on millions, often billions of dollars of their employees’ retirement money, corporate executives just couldn’t stop themselves from literally stealing it.

The result was the Amendment to the state Constitution guaranteeing all government employee pensions. And four years later, the national Pensions Benefit Guarantee Corporation was created. The private sounding government agency was created to put the onus on American taxpayers and corporations to comply with their contractually agreed commitment to hold and not spend their employees’ pension funds.



To show just how widespread and devastating Wall Street’s abuse of American workers has been for the past 40 years, the PBGC now insures 44 million private American workers against theft by their own corporate employer. During fiscal year 2010, the fund paid out $5.6 billion to American workers for pension funds that have disappeared. As of that time, the PBGC was carrying a debt of $23 billion.

At her speech at UIC two weeks ago, the Chicago Bar Association’s Ann Lousin reiterated that she has no vested interest on either side of the income tax or pension debate. She’s just someone who was there the day both were created and she has some very interesting insights.

Read the full report at RebootIllinois.com.

 

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