CHICAGO Illinois Gov. Pat Quinn’s proposal to make a 2011 temporary income tax increase permanent won praise from two key factions the General Assembly’s Democratic leaders and investors.
As expected, Republican lawmakers and Quinn’s GOP challenger in the governor’s race attacked the incumbent’s election year budget plan as a broken promise, while a prominent government research group had a mixed reaction.
The Civic Federation of Chicago praised the governor for offering both a five-year fiscal plan and a proposed fiscal 2015 budget that addresses the looming loss of revenue, but said it has serious concerns over whether Quinn’s plan would actually solve the state’s fiscal mess.
“We commend the governor for providing a detailed plan and strategy to address the financial cliff that otherwise would endanger the state’s already precarious credit rating,” said Civic Federation president Laurence Msall. “However we are concerned that simply extending the tax rate doesn’t fully address the state’s fiscal crisis.”
Quinn proposed a general fund budget that ranges between $32.2 billion to and $38.6 billion, the actual number depending on whether lawmakers make permanent the tax increase that begins to expire midway through the fiscal year on Jan. 1, approve property tax relief, and pay down the state’s bill backlog.
Quinn portrayed his decision to make the income tax permanent as needed to avoid dire cuts to education and state services. If the tax scales back as scheduled, the state would lose $1.6 billion of revenue in fiscal 2015 and $4 billion the following year.
A central concern for the Civic Federation is that the five-year plan would trim an estimated $5 billion bill backlog down only to about $2.2 billion by 2019. The federation recently offered a three-year roadmap that includes leaving the tax hike intact for one year and then partially reducing it to wipe out the backlog.
Quinn also wants to tighten existing spending controls and build a rainy day reserve but has not provided detailed information on either, Msall said. Quinn’s proposal also appears to rely on $650 million of interfund borrowing which the federation would oppose and does not proportionately share the increased income tax revenues with local governments.
Buyside professionals who anticipated the tax would remain intact generally agreed that Quinn’s position bolsters the value of the state’s bonds, which have already benefitted from passage of a pension overhaul in December.
“It took political will to pass the reforms and takes political will to propose to keep the tax in place,” said Robert Miller, senior portfolio manager for Wells Capital Management.
“Once a tax is imposed it rarely goes away and the state still has challenges to overcome but from a bondholders’ perspective keeping the tax is obviously a positive,” he said.
Republicans attacked the tax increase as damaging to the state’s economic competitiveness, but Miller said Chicago and Illinois remain economically vibrant so the revenue stability provided by the tax increase overshadows the economic impact concerns.
The state remains the weakest rated state at the A-minus level. Investors have rewarded the state’s passage of pension reforms as evidenced in its GO sale that saw spreads to the Municipal Market Data benchmark on its 10 year maturities shrink to 129 points from 160 basis points from June sale.
The state’s GOs saw some limited spread narrowing following the tax news, said Matt Posner, managing director, Municipal Market Advisors. Interactive Data Corp. said it saw “only very minor tightening” since the announcement.
In an early sign of how the tax plan will fare in the General Assembly where many members are up for re-election, the Democratic leaders endorsed it.
“I commend the governor for his political courage and honesty,” House Speaker Michael Madigan, D-Chicago, said of the proposal in an interview on the Illinois Lawmakers program. “I plan to support the governor’s position.”
Madigan said he demanded property tax relief and Quinn included a proposed restructuring of the state’s property tax credit on income tax filings. It would double the refund for most homeowners but those with higher property tax bills could actually see a loss. Madigan said he expects to call the plan during the current spring session.
“Governor Quinn’s budget plan outlines the steps that I believe we must take in order to maintain the progress made in recent years,” Senate President John Cullerton, D-Chicago, said in a statement. He countered Republican assessments that the state has squandered the extra income taxes collected to date noting that the bill backlog has been reduced by $3 billion.
Republicans went on the attack, including Quinn’s Republican challenger in the November governor’s race.
“Pat Quinn first promised the working people of Illinois he wouldn’t raise taxes by 67%” Bruce Rauner said in a statement. “He broke that promise, taking away nearly a week’s worth of pay for Illinois families. Then he promised his tax hike would be temporary. Today he broke that promise too and is doubling down on his failed policies.”
Republicans want to let the tax expire and believe the state can maintain funding levels for core services by making other “efficiencies” and through natural revenue growth.
State Sen. Matt Murphy, R-Palatine, said the caucus doesn’t buy the governor’s dire warnings of cuts. “They seem desperate to make this look so bad that there’s no reasonable way for this tax rate to go back down,” Murphy said.
