U of Ideas of General Interest ó October 1998 University of Illinois at Urbana-Champaign
Contact: Mark Reutter, Business & Law Editor (217) 333-0568; [email protected]
TAXES Declining stock market sure to trigger downturn in Illinois revenues
CHAMPAIGN, Ill. -- What goes up comes down. After years of extraordinary growth sparked by the rising stock market, Illinois faces diminished tax revenues if the New York Stock Exchange continues its recent skid, a University of Illinois economist says.
ìThe decline in the market reduces the wealth of individuals, which decreases personal consumption expenditure,î writes Robert W. Resek in the latest issue of Economic Edge, a newsletter of the U. of I. Institute of Government and Public Affairs. ìThis loss of spending will in turn directly reduce state sales tax revenue. In addition, personal and corporate income tax payments will be reduced by the decline in capital gains taxes.î
To gauge the potential effect of the recent market drop, Resek analyzed the value of all stocks this year on the New York Stock Exchange, then applied the changes in the Standard & PoorÃs 500 Index to determine the loss or gain in wealth of these blue-chip shareholders.
Shareholders are generally expected to use 4 percent of their stock market wealth each year in personal consumption. This number was used to determine the shareholdersà consumption of taxable items in Illinois, with the state tax rate applied to arrive at the estimated revenues generated by these purchases.
In determining the effect on personal income taxes, Resek assumed that Illinois stockholders pay capital gains taxes on the increase in value of their securities only when they sell them, and deduct from their taxes the losses from sold securities.
His analysis estimated that, compared with fiscal year 1998, tax revenues will drop by $521 million this coming year if the market remains at its Aug. 31 level for the whole year. If the market goes up, so will future tax revenues, while if it drops, future revenues also will tumble.
ìWhatever the case, the state of Illinois should be prepared for a coming revenue shortfall because of the stock market decline,î he warns.
Stock market growth contributed an estimated $350 million in Illinois tax revenues in fiscal 1998, including $114 million in sales tax revenues and $236 million in income tax revenues. Sales-tax revenues are expected to fall $21 million in fiscal 1999 compared with earlier forecasts and income tax revenues to slide by $150 million, according to the U. of I. newsletter. Overall tax revenues in Illinois are expected to total about $16 billion.
Resek believes his estimates are, if anything, conservative. One victim of the current market downturn is the proposal to double the current 5 percent income-tax credit for property taxes paid on owner-occupied homes. This plan, popular among some legislators last spring, would cost the state about $200 million a year in lost revenues.
-mr-
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