Gov. Pat Quinn and state legislators will have to be held accountable on spending this year. They can’t afford not to be.

Without help from a federal stimulus package, the state could face up to a $9 billion deficit. Declining revenues merge with overdue bills for an ominous picture. And that’s before the nation’s economic crisis is fully taken into account.

Quinn said last month that drafting a “rescue plan” may take “the wisdom of Solomon” and maybe even “divine intervention.” But, he said, “we will do our very best to find the fairest, most balanced way to dig out of a $9 billion deficit that I’ve inherited from my predecessor,” former Gov. Rod Blagojevich.

Quinn delivers his first budget address March 18. He says he doesn’t favor tax increases, but they are on the table. Economists say that won’t be enough.?The state would need all three — more revenue, less spending and federal aid — to start to recover from the economic crisis, made worse in Illinois by years of over-promising and underfunding state services.

The national recession clearly is taking a toll on Illinois’ revenue outlook. The forecast looks worse than it did in November, according to the legislature’s bipartisan Commission on Government Forecasting and Accountability. It says revenues for the current fiscal year, FY 2009, would be $1.34 billion less than the level budgeted.

That’s partially because this year’s spending plan assumed the state would collect $435 million for the sale of the state’s 10th riverboat license, but the winning bid for the license came in at only $125 million — and that money won’t be available this fiscal year.

In short, the revenue picture “worsened virtually overnight to nearly 
$1 billion less than the previous year,” the commission said in its January revenue forecast.

The commission added that it may need to make further adjustments when state income and sales tax revenues decline as the recession unfolds. The cumulative damage: at least $1.6 billion in delinquent revenue by this month.

Quinn will have to work with legislators not only to bring in more revenue, but to hold the line on spending.

Illinois Comptroller Dan Hynes said last month that if all spending levels were held flat this coming fiscal year — meaning no increase for education, health care or other programs — then the state faces an $8.95 billion deficit. That could drop to $5.94 billion if Illinois received about $3 billion from a federal stimulus package. But the amount of a stimulus check was fluid as of press time.

Quinn acknowledges that bringing in more revenue through tax increases is extremely difficult when average citizens are losing jobs and health benefits. But he, as well as Democratic legislative leaders, have said that nothing, including an income tax hike, can be ruled out.

Two years ago, business executives who belong to the Civic Committee of the Commercial Club of Chicago backed an income tax increase on individuals by 1 percentage point, bringing the rate to 4 percent, so long as the state coupled it with reforms to address mounting costs of public employee pensions and retiree health care benefits.

Tom Johnson, president of the Taxpayers’ Federation of Illinois, says his organization could support the increase if the reforms came along with it. “If those components are not addressed as a part of a fiscal plan,” he says, “we have a difficult time addressing the problem only with tax increases. There needs to be cost containment.”

In fact, a 1 percentage point increase on the individual tax rate would garner about $4 billion. (The current 3 percent rate brings in about $11 billion.) But some of the new revenue would be returned to low-income taxpayers who qualify for tax exemptions.

Increasing the income tax rate on businesses from 4.8 percent, which currently generates about $2 billion, to 6.3 percent would raise less than $1 billion.

In other words, increasing the state income tax rate by 1 percentage point isn’t enough to close the current budget gap, let alone pay for new spending.

Quinn repeatedly has said he intends to develop what he deems a fair tax structure, and by appointing former Voices for Illinois Children president Jerry Stermer as his chief of staff last month, Quinn narrowed that statement to a tax structure that is fair “to parents raising kids.”

Quinn said: “I saw once that our state gives more tax breaks to those raising thoroughbred horses than it gives to parents raising children. We’re going to change that.”

Stermer cited the Earned Income Tax Credit for low-income families as one example of a “fairness strategy” that the administration will consider.

He specifically mentioned the need to ensure that health care providers who care for Medicaid patients receive more timely payments from the state, and he is a longtime advocate for reforming the way Illinois pays for public education. By saying that he and Quinn will keep a clear eye on “future generations of Illinois,” such ideas as increasing income taxes to help decrease local property taxes could be in the works. 

Balancing tax reforms with the desire to increase funding for education and health care would be tricky when economists say the state needs to spend less, not more.

Spending less, however, could mean cutting some core and politically sensitive government services. The largest expenditure is public education at about $14 billion, followed by health care and human services for a combined $23 billion. Such services include Medicaid for low-income and disabled patients, child care and substance abuse treatment. 

Alternative cost-cutting measures could include shorting the state’s payment into the public employee pension systems. The state must contribute about $1.2 billion next year, but delaying the state’s contribution only adds to the growing mountain of debt.

Trimming public employee payrolls is another idea. But Senate President John Cullerton said in January that Illinois employs about the same number of workers today as it did in 1972. And federal officials expressed concerns last month that the Illinois Department of Transportation may be too understaffed to handle construction projects under a new stimulus program.

Quinn said last month that laying off employees during a recession would be counter-productive. State and local governments are one of the largest forces in our economy, he said, “and we have to make sure that it doesn’t get paralyzed.”

Part of Quinn’s plan to revive the state’s economy and job growth is to craft a major capital program for road and school construction. Quinn and legislative leaders say they want to tap into federal funds set aside for Illinois. While such a capital bill would put thousands of people to work and help revive construction-related industries, the state would have to put forth its share of the cost before the feds offered matching funds.

In the past, under then-Gov. George Ryan, lawmakers increased vehicle registration fees and liquor taxes to pay for a $12 billion capital plan.

This year, one of the early proposals is to increase the state tax on motor fuel by 8 cents a gallon, with the revenue strictly reserved for financing a capital program.

The state’s portion of the tax on motor fuel has been 19 cents per gallon since 1990. The increase is justified, says David Merriman, a public administration professor with the Institute of Government and Public Affairs at the University of Illinois at Chicago.

He adds that unlike a sales tax, the motor fuel tax is based on gallons, or units, used, so it’s reasonable to increase the real price and counteract the negative effects of traffic congestion and wear and tear on the roads.

Lawmakers so far have questioned the effect on consumers if the price of gas increased to $4 a gallon, as it did last year.

Merriman says if gas prices skyrocket again, the motor fuel tax would be a relatively small portion of the price consumers pay at the pump. He says legislators could protect some consumers by allowing, for instance, taxicab drivers to levy a surcharge on fares or grant other tax breaks to low-income residents.

Johnson of the Taxpayers’ Federation of Illinois says the motor fuel tax would be an acceptable way to pay for transportation-related projects, but he says lawmakers won’t know how much money they would need to collect in tax revenues until they do two things: 1) stop raiding money from the dedicated Road Fund to pay for day-to-day state operations and 2) define the responsibilities of the state versus local governments in paying for construction and maintenance of school buildings, state facilities and mass transit.

He says with the addition of one-time federal funds, lawmakers would have to be careful to avoid over-promising that the state could afford to pay for ongoing costs once the federal funds ran out.

“That’s the planning process,” he says. “It’s not building expectations that cannot be maintained.”

By mid-February, Quinn had not taken a stance on a motor fuel tax increase. 

Jim?Nowlan, former president of the Taxpayers’ Federation of Illinois and a senior fellow at the Institute of Government and Public Affairs, says a 1 percentage point increase in the state income tax rate, combined with the federal stimulus package, could help close the budget gap. But lawmakers also would have to hold the line on spending, if not cut some. He adds that the public won’t want to pay more in taxes when they don’t trust state officials to spend it wisely.

Public officials at every level will have to be held accountable. Otherwise, operating under the same pretenses that the state can provide essential services without fully funding them would be the opposite of penny wise, and it would be far more damaging than pound foolish. ?

The state would need all three — more revenue, less spending and federal aid — to start to recover from the economic crisis, made worse in Illinois by years of over-promising and underfunding state services.

Increasing the state income tax rate by 1 percentage point isn’t enough to close the current budget gap, let alone pay for new spending.

Bethany Jaeger can be reached at capitolbureau@aol.com.

Illinois Issues, March 2009