Wednesday, June 6, 2012

Illinois Government Spending Continues ... Medicaid and Cigarette Tax Hikes

Illinois Blows Smoke at Taxpayers asserts that the state's newly enacted "cigarette tax hike is an unintentional gift to neighboring states."

The article opens with a fictitious warning to states who try to address their spending problems by raising cigarette taxes:

"Warning: The surgeon general has determined that states choosing to address their spending problems by raising taxes on tobacco risk seeing real fiscal restraint go up in smoke."

Such a warning might be especially instructive for Illinois. There the Democratic legislature (with the help of Republicans in the state House) has just raised cigarette taxes by a dollar a pack. Gov. Pat Quinn says everyone wins: The higher tax means more revenue for Medicaid from those who continue to puff, while the higher price will encourage some to quit, lowering smoking-related health costs for the state.

Altogether the new taxes on tobacco products are projected to bring in $350 million. These dollars will be matched with federal funds, for a total of $700 million. In other words, what we have here is a "revenue enhancer"—something Republicans are constantly told they must embrace if they are serious about bringing government budgets into balance. . . .
With Illinois Medicaid now spilling enough red ink to fill Lake Michigan—it accounts for slightly less than a third of the state budget—the legislators who voted yea are no doubt telling themselves they have done the responsible thing here.

Then again, it depends on what you mean by responsible. Within the great American Midwest, there exists a whole other approach to responsibility and Medicaid. It's called Ohio.

Unlike Illinois, Ohio has a Republican governor, John Kasich, and a reformist Republican legislature. Unlike Illinois, Ohio's governor ruled out tax hikes as a way to address his state's budget hole ($8 billion). And unlike Illinois, whose Medicaid cuts mostly do nothing to slow the growth of spending, Ohio's Medicaid program expects to see its annual rate of increase cut in half.

How did Buckeye Republicans do it? It turns out that when you can't rely on dubious revenue projections, you get more serious about spending. . . .

In sharp contrast, the cigarette tax in Illinois raises many more questions than it answers. Take the projected $350 million in revenue, which is designed to help close a $2.7 billion Medicaid gap.
Illinois is unlikely to meet that target, if only because it is bordered by several states that will now have much lower tobacco taxes. Once again Indiana Gov. Mitch Daniels will have the last laugh on Gov. Quinn. With a cigarette tax that will now be half that of its neighbor, Indiana merchants and the Indiana government will soon enjoy the dollars flowing in from Illinois citizens crossing the border to buy cheaper smokes.

The different approaches to Medicaid reform taken by Illinois and Ohio are a microcosm of the same basic choice that will be before the American electorate come November. It's whether we will have government that lives within its means—and can correct its excesses—or whether we will have Greece. . . .

John Tillman, CEO of the free-market Illinois Policy Institute, describes what's really going on with the cigarette tax this way: "The governor and the legislature have opted for making the 2011 'temporary' tax hikes permanent by keeping Medicaid spending at unaffordable levels and relying on more tax dollars to finance it. Worst of all, by looking to taxes they have failed to address the real problems in Medicaid."
That's the problem with rosy "revenue enhancers." Instead of solving the problem of overspending, they tend to give politicians just enough wiggle room to avoid facing up to it. You might call it "blowing smoke.""

Summing Up

So cigarette tax hikes are expected to raise $350 million and the federal government will match that $350 million with another $350 million. And that maneuver is something called a revenue enhancer.

Here's my question: Where will the federal government get its $350 million? By borrowing it from the Chinese?

So Illinois politicians are once more giving taxpayers the shaft in the name of "pretend" fiscal prudence. And the federal government, as ever, is complicit by sending Illinois matching funds which it doesn't have to match.

Someday we'll have to start using real numbers and doing real things about solving our all too real problems.

Until then, I can't wait to see how Illinois will solve its $85 billion and counting pension funding issue. If it goes the revenue enhancer route, that's a whole bunch of $350 million projects.

Oh, I'm sorry. I forgot the feds will match that amount by borrowing it from China and others.

Aren't revenue enhancers, aka tax increases, a wonderful way to avoid addressing real spending problems?

Thanks. Bob.

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