PI Original Adam Doster Friday January 7th, 2011, 12:23pm

Breaking Down The Proposed State Tax Deal

Illinois lawmakers are just days away from potentially solving the state's crippling, multi-year budget crisis. Is the deal a good one?

Illinois lawmakers are just days away from potentially solving the state's crippling, multi-year budget crisis.

As has been reported in just about every media outlet statewide, Gov. Pat Quinn, House Speaker Michael Madigan (D-Chicago), and Senate President John Cullerton (D-Chicago) have reached a tentative agreement to push a tax and borrowing package that would temporarily raise the personal income tax rate from 3 percent to 5.25 percent. The deal, if ultimately approved by lawmakers, would also increase the corporate income tax rate from 4.8 percent to 8.4 percent and boost the state's cigarette tax by $1 per pack (to $1.98) to increase education funding. In full, the gambit would generate roughly $7.5 billion per year.

On top of the tax changes, Illinois would borrow roughly $12 billion to pay off the state’s annual pension contribution and its growing backlog of bills immediately and would use a portion of the revenue from the tax hike to cover those bonds. After four years, the personal income tax rate would drop back down to 3.75 percent. After 14 years, it would sink once more to 3.25 percent. And for the next three years, the General Assembly would be prohibited from instituting new state programs.

What would the new revenue fund? Two-thirds of the income tax cash (roughly $4.5 billion) would be devoted to deficit reduction. A quarter-point ($1 billion) would be split evenly between education and human services. Another quarter-point would, like we mentioned above, pay for the bond deal. And a final quarter-point would be rebated annually to taxpayers in the form of a $325 property tax check. (This rebate would also be made permanent.)

Some think the House could vote on the pact as soon as today. The Senate is not in session, however, so they cannot move on the measure until they reconvene next week. That gives us a bit of time to flush out a few important questions about the crucial development under the capitol dome:

When would the changes go into effect?

The short answer is soon. The governor's office would request the $12 billion in bonds quickly and would aim to erase the backlog (which is at least $5 billion currently) by March. We can't stress enough how important those payments are. Last year, 72 percent of non-profit organizations in Illinois reported delays in reimbursements, for example, which forced deep service cuts and layoffs. Schools and other vendors dealt with the same problem. These organizations will only grow more desperate if the state government continues to string them along. (Closing the gap would also mollify nervous bondholders, who have warned officials for months that the state will keep paying unnecessarily high interest rates on the bonds it issues unless lawmakers take forceful action.)

Cullerton said that the new income tax rate would be based on 2011 incomes, which kicked in last week. That means your 2010 tax bill, due in April, will not reflect the change.

Is the deal fair?

We've long argued that the Illinois tax system is both inefficient and unfair. While these changes would wipe out the state's existing debts (and likely most of the structural deficit Illinois accrues each year), it should not be confused with fundamental tax reform.

Unlike the tax increase the Senate approved in 2009, this package would not provide tax relief to low and working-class people by ramping up the personal exemption an individual taxpayer can claim against the state income tax (just $2,000 per family member) or the state's Earned Income Tax Credit (the second-lowest state credit in the country.) It would not expand the sales tax to include discretionary consumer services -- think lawn care and health clubs -- that wealthier people disproportionately use and that remain untaxed. The state's commitment to education funding would improve, to the tune of $700 million per year, which is long overdue and extremely important. But progressive lawmakers and advocates will have to continue fighting this decade to ensure Illinois stops soaking the poor to pay for core services.

Will Dems go it alone?

Since 2009, Speaker Madigan has made clear that his party will not pass an income tax increase without Republican help. But the GOP doesn't seem to be very interested in lending assistance this month.

State Sen. Dale Righter (R-Matoon) delivered a characteristic response to the news yesterday. "It’s taken us a decade to get into this problem," he told the Pantagraph. "I don’t know why we think we need to solve it in two weeks like the Democrat leaders apparently intend to do."

Let's table Righter's revisionist history (this tax debate has been taking place for years) and his pejorative use of "Democrat" leaders. If the core of his statement is correct and Republicans insist on sitting this one out, can the Dems get it done on their own?

Yes and no. The party could certainly make changes to the tax code, which only requires 60 votes. (We tried to game out the intra-caucus math back in November.) Borrowing bills, however, require a three-fifths super-majority, which the Democrats currently do not hold. If that end of the bargain goes up in flames, the best the comptroller's office could do is pay down our late bills extremely slowly -- thereby exacerbating the problems social service providers and other vendors have experienced for months on end. The pension payment would likely be skipped, as well.

Governor Quinn's focus, therefore, should be directed solely at the lame-duck Republicans who are vacating their seats next Tuesday. Some have hinted that they are open to crossing the aisle. By Tuesday, we will know for certain.

UPDATE (12:00 p.m.): The House went on recess this morning without taking a vote on the deal. They are scheduled to return Sunday.

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