Chicago business group opposes Illinois graduated income tax amendment

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The civic arm of a prominent Chicago business group threw cold water on the state’s efforts to move to a graduated income tax in the absence of long-term fiscal plan that tackles pensions and overdue bills through reforms, cuts, and new revenues.

Voters will decide the fate of the constitutional amendment — championed by Gov. J.B. Pritzker and the Democratic majority while opposed by the GOP minority — on the November ballot. If approved, the state would move to a graduated income tax rate from the current flat one. An approved rate structure would raise taxes on the top 3% of earners raising an estimated $3.6 billion of new revenue. Without it, the governor's administration has warned that steep across-the-board hike might be needed.

“With its chronic budget deficits, growing pension debt, and backlog of unpaid bills, the state of Illinois has been the poster child for poor fiscal management for decades” and the “graduated tax amendment, if passed, all but promises that Illinois will not address its long-term financial challenges,” the Civic Committee of the Commercial Club of Chicago wrote in a statement.

The committee is made up of senior executives of the region’s leading employers. It often weighs in on state finances and pensions. Illinois is one of nine states with a flat rate with 32 using a graduated rate structure. Backers say the graduated rates are fairer to lower earners. The GOP and other opponents argue the constitutional change will make it easier for the state to enact future cuts that impact the middle class and prompt some residents and businesses to flee the state.

The state is rated at the lowest investment grade level by Fitch Ratings, Moody’s Investors Service, S&P Global Ratings. All agencies assign a negative outlook.

“The result will be further loss of jobs and people, long-term cuts in critical social services, a shrinking tax base burdened with growing debt, and a guarantee that Illinois will continue to have the worst credit rating of any state in the country,” the statement read.

The measure would take effect midway through the state’s fiscal year so just half of the revenue is expected and the COVID-19 pandemic will make a dent in that figure so that it only provides an additional $1.2 billion. If voters reject it, the state has said it could tap $1.2 billion of borrowing authority to make up for the gap in the fiscal 2021 budget.

The committee said it could back the amendment if it were part of a comprehensive plan to tackle the state’s structural balance woes, roughly a $7 billion bill backlog, and $137 billion pension burden while also build reserves that currently hold little.

“The solution, as we have called for repeatedly, is a comprehensive plan that includes new tax revenues, spending cuts, and reforms far more substantial than the projected revenues from the graduated income tax,” the group wrote.

The COVID-19 pandemic underscores the need to put the state on better fiscal footing to weather storms, the group said. The current fiscal year budget is down $4.6 billion of revenue due to the pandemic’s toll on tax collections.

“The state’s fiscal situation is not only a chronic disincentive for people and businesses to locate in Illinois, but it also seriously jeopardizes the ability to provide critical services to Illinois residents. Simply put, Illinois’ financial situation is unsustainable,” the group wrote.

Rating agencies have said they will be watching to see how the state addresses its fiscal planning if the amendment fails and that failure by itself is not a rating trigger. But the pandemic will make it all the harder to adjust as the budget also relies on $5 billion of federal relief with the near-term prospects uncertain. The budget authorizes borrowing through the Federal Reserve’s Municipal Liquidity Facility to cover spending as a bridge to federal help but in the absence of a federal package deep cuts would be made.

S&P warns in a recent report the state’s pressures are mounting. “With the need for additional borrowing, an elevated bill backlog, and lingering substantial structural imbalance, Illinois could exhibit further characteristics of a non-investment-grade issuer,” analysts wrote.

The committee believes voter rejection would force the state and other stakeholders to come to the table and agree to a long-term plan of action. Some of the group’s suggestions include raising pension funding more quickly to a level that would halt the growth of unfunded liabilities, taking steps to bolster the state’s ratings to the double-A level it once enjoyed, and to consider pension modifications that would end the automatic 3% cost of living increases. The latter would require a constitutional amendment allowing the state to bypass the existing pension clause that protects benefits from diminishment or impairment.

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