On Friday, it looked like the General Assembly finally might suck it up and take some serious steps to address Illinois' multi-billion dollar budget deficit. On Monday morning, the day of Gov. Pat Quinn's inauguration, the outcome is far from certain.

Late last week, we ran through the basic outline of the deal Democratic leaders initially drew up. Over the weekend, tax-averse House Democrats aired their grievances with the package. Some lawmakers, facing headlines that characterize the income tax increase as "giant," are simply experiencing sticker shock. Several others suggested that changes to the corporate tax rate would unfairly penalize businesses. Corporations pay a 2.5 percent "replacement" tax on income in Illinois, which is routed to local governments, so this hike would bump the total levy on employers up to 10.9 percent.

The property tax rebate plan that was included is generating ire, as well. State law currently allows a homeowner to claim a personal income tax credit worth 5 percent of the property taxes he or she pays on their primary Illinois residence. Under the loose proposal being discussed in Springfield, that credit would be phased out in exchange for an annual $325 property tax rebate check.

It's a good deal for many taxpayers, as the median homeowner in the Land of Lincoln only takes home roughly $170 because of the credit every year. Still, anyone who pays more than $6,500 per year in property taxes would actually owe the government more money next year. Why? Their $325 rebate would not cover the cash they'd forfeit if the existing 5 percent credit vanished. (HB 174, for what it's worth, would double that available credit.)

Yesterday, the House adjourned without taking any tax votes. After the inaugural festivities this afternoon, they will get back to work. The concerns raised over the past three days are obviously legitimate and should be debated before any agreement is reached this week. But with time winding down before the new batch of lawmakers take their seats under the capitol dome, let's also consider the serious danger inaction poses.

Pension Borrowing

This deal, remember, would also allow the governor's office to borrow roughly $12 billion immediately. A portion of that cash would be used to fund the state's annual (and constitutionally mandated) pension payment. If the General Assembly rejects the borrowing provision, which requires a three-fifths majority in both chambers, they really back themselves into a corner. Lawmakers could either skip the $3.7 billion payment entirely, costing the pension systems roughly $25 billion in future value, or divert an equal amount from the state's General Revenue Funds, thereby starving cash-strapped agencies like the Department of Human Services. Selling bonds, as Moody's Investors Services wrote last month, "would at least limit deterioration in the funded status of the state’s pensions."

Bond Rating

Speaking of the credit rating agencies, some nervous bondholders moved the goalposts upon hearing news that a budget deal was in the works, telling the Tribune that the proposed changes "don't go far enough" to assuage their worries. (A bad bond rating increases the cost of borrowing.) But let's be real: for months and months, those same investors have clamored for a solution that raises the income tax rate by at least 2 percent. From a Bloomberg piece in July:

“The overseas investors we talk to, when we told them we could balance the budget with a 2 percent increase in individual and corporate income taxes, that pretty much raises about $6 billion,” he said in a July 28 interview with [Quinn administration Budget Director David] Vaught. “They looked at us and said, ‘Only a 2 percent increase?’ They were amazed by that.”

If lawmakers closed a deal this week, it's very likely that the credit rating agencies would reward the state with little hesitation. As John Miller, the chief investment officer of Nuveen Asset Management, said last week, spreads could tighten "quickly."

Late Payments

On top of the pension contribution, borrowing $12 billion would also allow Illinois to pay off (by March) its massive backlog of obligations to schools, localities, social service providers, and other state vendors. And those late bills are stacking up quickly; a new quarterly fiscal report (PDF) issued late Friday by Comptroller Dan Hynes estimates that the state could face $7 billion to $10 billion in unpaid bills by June. (The oldest bills, his office notes, stretch back to the middle of last July.) That would put the state's FY 2012 budget deficit at $17 billion, or roughly 67 percent of the state's total general fund. From the report:

"Absent any significant budgetary developments, such as the initiatives currently under discussion in the General Assembly, the outlook for the state’s fiscal condition does not look to show any improvement and in fact is expected to weaken further."

Ensuring that these payments are made quickly and in full (by any means necessary) is crucial if lawmakers want to protect both the welfare of constituents who rely on state services and private sector jobs.

A Missed Opportunity

Extending this debate beyond the veto session, which technically concludes Tuesday but could bleed into Wednesday morning, would all but doom an income tax increase. To get this through, the Democratic leadership needs the support of lame-duck lawmakers from both parties who can take a tough vote without considering electoral repercussions. And without a temporary tax hike, closing the existing budget gap and the state's structural deficit, at least for the next four years, is literally impossible.

In short, this week represents the best (and perhaps only) chance we have this year to clean up this mess in a way that's responsible and (largely) fair. It's time to get it done.