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Illinois Issues
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State of the State: The Search for New Revenue Sources will Come to a Head This Month

Bethany Jaeger
WUIS/Illinois Issues

Democrats and Republicans fully expected to make tough choices this year. As they react to the 17th month of a national recession and a $12.4 billion deficit projected for next year, Illinois lawmakers are on the hot seat now.

Gov. Pat Quinn proposed his own plan that would trim spending and generate new revenues. Some of his money-making ideas are expected to create tough votes for lawmakers before May 31, the day they’re supposed to adjourn the spring legislative session. 

The ultimate goal is to plug the deficit in the operating budget and to spur economic activity with construction projects in a capital budget.

Anticipating that some of Quinn’s ideas will fail, Democrats are advancing some of their own. Republicans also have offered alternatives. But the bipartisan tone established early this year may not survive the end-of-session votes on whether to increase state taxes.

Republicans want to cut spending, but Democrats say that won’t be enough, that the state will need more revenue, too.

Democratic House Speaker Michael Madigan told Illinois Issues last month that he doesn’t expect “cooperation or support from the Republicans.”

Senate President John?Cullerton says it is an unusual year when Democrats look to cut the budget and target pensions of teachers and state employees, both of which tend to be their political allies.

“So we’re not acting like Democrats normally act, and we’d ask the Republicans to not act like Republicans normally act,”?Cullerton says. “And at the end of the day, when we still have a deficit after we do all this cutting, we need some help on raising money for a capital bill and to close the deficit.”

Republicans, however, firmly oppose an income tax increase, especially during a recession. They’re also weary of such revenue proposals as increasing the state’s sales tax on cigarettes, extending the sales tax to some coffee and hygiene products and ending some corporate tax breaks.

In turn, the Senate GOP?highlighted ways in which the state could reduce its costs of Medicaid programs, which consume most of the state’s revenue each year. One idea was to partner with the private sector, letting the new partners decide who would be eligible for public benefits.

Senate Minority Leader Christine Radogno says people are angry and feel that government does nothing but take money from them. “And in Illinois, it’s been demonstrated that we have a pretty corrupt system, so I think people are in no mood to spend more money.” 

House Republican Leader Tom Cross joined Radogno in March to support the idea of expanding gaming to finance a capital construction program for roads, bridges, transit and schools.

Cullerton, on the other hand, says he would not finance a construction program with gambling revenues, although he would consider gaming as a way to lessen the need to raise the income tax. 

Ultimately, neither party is willing to go far enough to whip the state’s budget into shape within a couple of years. 

Kent Redfield, a political scientist at the University of Illinois at Springfield, says if the state were to significantly cut spending, it would have to go after the two largest expenditures: education and health care. On the other side of the equation, if the state were to generate significantly more revenue, then it would have to go after hefty income and sales taxes. 

The other revenue ideas are ancillary, he says, and wouldn’t add up to major money-makers.

“Ultimately, what’s going to get to the governor’s desk are going to be what John Cullerton and Mike Madigan want to get to the governor’s desk,” Redfield says. “I think it’s a diversion at this point to be playing at the margins.”

Democrats could save the largest vote — to increase the income tax — as leverage for gaining Republican support for a construction program.

In the meantime, they’re likely to debate at least some of the following revenue proposals.

Operating budget

Income tax The highest profile vote will be whether to increase the state income tax. Quinn proposed increasing the rate for individuals from 3 percent to 4.5 percent. The rate applied to businesses would increase from 4.8 percent to 7.2 percent. 

But Quinn wants to use some of the new revenue to help shield low-income families from the increase, so he proposes tripling the personal exemption from $2,000 to $6,000. If enacted, the state would net an estimated $3 billion a year.

Without GOP support, Democrats may seek a lower rate increase and scale back Quinn’s personal exemption. One example is Senate Bill 2036, which would increase the rate by 0.375 of a percentage point and generate about $1 billion. The new money currently would be designated to a construction program.

Cigarette tax The Senate already approved SB 44, which would increase the state sales tax on cigarettes by 50 cents a pack this September and another 50 cents a year later. It also would reclassify small cigars as cigarettes, generating an estimated total of $350 million for the next two fiscal years. Most of the revenue would be designated for paying health care providers who participate in public aid programs.

Six Democrats, however, voted against the measure. A seventh, Sen. Emil Jones III, didn’t vote at all. So the measure eked by with the 30 votes it needed to pass, a sign of how future tax-related votes could pan out.

“This was the first bill that required people to actually vote for a tax,” Cullerton said last month. “And you can see it’s not easy for people to do that. Unfortunately, we’re probably going to have to do a lot more.”

The House has two versions, HB 454 and HB 1196 that have not advanced. 

End retailers occupation tax Quinn’s budget proposes ending a tax incentive for retailers. They no longer would be able to keep a portion of the sales tax that they currently get for collecting the tax on behalf of the state. The new revenue would help pay for a 10-day “back-to-school sales tax holiday” for shoes, clothes and school supplies each August.

The legislature has four versions of bills to end the tax incentive, none of which have advanced very far. They include SB 9SB 19SB 45 and HB 328.

Expanded sales tax Quinn proposes reclassifying sweetened teas, coffee drinks and some hygiene products. The change would increase the sales tax from the food and drug rate of 1 percent to the general merchandise rate of 6.25 percent. It would generate $14 million.

End other corporate tax breaks Quinn also wants to generate about $287 million, including money from changing the sales tax on tea, coffee and hygiene products, by repealing an unutilized tax credit for research and development, taxing prewritten “canned” software and ending the manufacturer’s purchase credit.

Internet Lottery Senate Democrats have advanced SB 1654, which would create a pilot program to sell tickets for the Lotto and Mega Million games online. It also would allow the state to hire a private firm to manage the asset. Sen. Don Harmon, the sponsor from Oak Park, says the idea would be to “contract with someone smarter than us to operate it.” 

Short the pension payments Although one of Quinn’s proposals doesn’t count as new revenue, his idea to reduce the state’s contribution into its five public employee pension systems would free up some cash for other purposes. Quinn proposes skipping out on about $500 million this fiscal year and $2.3 billion next fiscal year. 

Teachers’ unions and state employees strongly oppose the idea. 

Federal stimulus Education groups also dislike the idea of diverting some federal stimulus funds that are earmarked for public education to pay for general state operations, but the plan already is in motion, with the expectation that the state could reinvest more money into education as the economy recovers.

Capital budget

Driving-related fees Quinn would increase various fees, including those for vehicle registrations and driver’s licenses. He also would use money from the dedicated Road Fund to sell bonds for road, bridge and mass transit projects. 

The national recession has affected vehicle registrations in Illinois. According to the legislative Commission on Government Forecasting and Accountability’s April revenue update, new car and truck registrations dropped to “levels not seen in decades” in March. “Moreover, there are no signs of any near-term change in direction.”

Snag the local share of income tax Quinn also would siphon off a portion of the new income tax revenue that normally would go to local governments to help finance school construction projects. 

Local governments are angry that they wouldn’t get their traditional 10 percent.

Motor fuel tax increase Quinn opposes an increase in the motor fuel tax to fund construction projects.?The tax has been 19 cents a gallon since 1991. But Democrats already are considering HB 1, which would increase the tax by 8 cents a gallon. 

Sen. Martin Sandoval, however, says it wouldn’t generate enough money to meet the needs of mass transit systems, particularly in the Chicago area.

Video gaming House Democrats also have advanced HB 4239, which would legalize video poker machines and tax them, potentially generating up to $500 million a year, according to Rep. Frank Mautino, the Democratic sponsor. He would dedicate the revenue to school construction projects, starting with a list of 23 schools that have been waiting for money the state promised them in 2002.

 

The bipartisan tone established early this year may not survive the end-of-session votes on whether to increase state taxes.

Democrats could save the largest vote — to increase the income tax — as leverage for gaining Republican support for a construction program.

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

Illinois Issues, May 2009

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