Illinois graduated tax plan will face tougher audience in state House

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Gov. J.B. Pritzker’s plan to shift Illinois to a graduated state income tax is in the hands of the state House of Representatives after passing its first legislative test in the Senate.

The Senate on Wednesday after little debate approved in a 40-19 vote SJRCA1, which would ask voters to amend the state constitution to eliminate the requirement for a flat income tax rate. All Democrats voted in favor of the joint resolution and all Republicans cast a no vote.

Negotiations over a rate structure remain in play, but the graduated rates Democrats are talking about would raise between $3.3 billion and $3.4 billion in new annual revenue for the cash-strapped state government.

State spreads that have moved in tandem over the last four years with state budget and pension developments saw a mixed reaction after the vote, said IHS Markit strategist Edward Lee.

The state’s long general obligation tax-exempt maturities Wednesday traded several basis points weaker than a day earlier while the short end was flat. Trades Thursday were one to two bps wider Thursday.

Taxable bonds saw yields trimmed by four basis points Wednesday and they further narrowed by five basis points on Thursday, Lee said.

The state’s 10-year has been trading around 178 basis points above the Municipal Market Data top benchmark while the long end has been at a 168 bp spread.

MMD on Thursday tightened Illinois spreads by five basis points between 2022 and 2034 and two basis points between 2035 and 2049 due to a combination of factors, said Daniel Berger, senior market strategist for MMD-Refinitiv. "It was the quest for yieldier paper and the Senate vote certainly gave these bonds a more positive tone," Berger said.

The legislative package heads to the House where it faces a tougher road to getting to a required three-fifths supermajority of 71 votes. Some Democrats have seen pushback in their districts and raised concerns over the move’s long-term impact on tax rates; Democrats hold 74 seats to the GOP’s 44.

Republicans are opposed.

“A graduated income tax will make it easier to raise taxes and even easier to play games with our state’s tax code,” said Senate Minority Leader Bill Brady, R-Bloomington.

Republicans warned that their fears were already coming to fruition with the Senate Democratic rate structure that includes a slightly higher top rate and lower income threshold than the governor’s proposal. “Since the governor put out his proposal…the top rate has already gone up,” Sen. Dale Righter, R-Mattoon, said.

Democrats defended the change.

“Year after year our state has gone from one crisis to the next. At the heart of it all is a nearly 50-year-old provision in our constitution that simply no longer reflects our modern economy. Today, we took an overdue first step toward giving voters the power to change it,” said Senate President John Cullerton, D-Chicago.

“There is no other plan on the table" for the state to combat its more than $3 billion structural imbalance and $8 billion bill backlog, said Sen. Toi Hutchinson, D-Olympia Fields, who sponsored the tax rate legislation.

Pritzker has proposed a “bridge” budget for fiscal 2020 that relies on more than $1 billion in additional revenue from various tax measures and license fees from implementing sports betting and recreational cannabis and $1.1 billion in pension funding relief primarily from extending the current funding schedule. Votes on those measures and the budget have yet to take place with a scheduled adjournment by May 31.

The constitutional amendment resolution does not require the governor’s signature. It would go directly to voters on the November 2020 ballot where it would need either a 60% approval rate of voters casting a decision on the measure or a majority of those voting in the election.

House Speaker Michael Madigan, D-Chicago, reiterated his support for the change, but did not comment on the rate structure or other measures approved by the Senate that would impose a local property tax freeze and repeal the estate tax.

“As I know you will recall the Speaker has publicly supported the fair tax since last November. House Democrats will continue to work with the Governor and Senate supporters on the issue. House action will commence as events warrant,” Madigan’s spokesman Steve Brown said in an email.

Pritzker praised passage of the amendment and the sponsors of the various pieces of legislation for “their leadership and commitment to stabilizing our state’s finances” but he did not comment specifically on the Senate rate structure or other proposals. “I look forward to continuing our conversations with stakeholders in the House as we take action on the fair tax,” Pritzker said.

The Senate Democratic version of a graduated tax structure and several other companion bills that become law only if voters approve the amendment lost some Democratic votes.

The Senate passed tax brackets and rates in SB687 on a 36-22 vote. Three Democrats voted against it and one did not vote. Like the governor’s proposal, it would raise taxes on only the top 3% of earners. It differs in that the top rate is raised to 7.99% from the governor’s proposal of a top 7.95% rate. The current flat rate is 4.95%. The corporate rate is raised to 7.99% from 7%. Pritzker proposed raising the corporate rate to 7.95%.

The Senate plan would generate $3.6 billion more annually from individual taxes and $350 million from corporate filers, providing $100 million more annually for local governments and $130 million for child care programs. Once deductions are made to cover various child tax credits and property tax relief, the state would see $3.325 billion in new annual revenue.

The Senate package first unveiled on Tuesday includes two other pieces that take effect only if a constitutional amendment is adopted. They are aimed at winning over some Democratic votes by offering property tax relief and breaks on other taxes.

SB689, which passed 33-24, would eliminate the estate tax, which generates about $305 million annually.

The other is SB690, which would limit local school district boards from raising property taxes as long as the state meets its obligations to fully fund aid formulas revised in 2017 and categorical grants at a cost of about $650 million annually. It makes exceptions for debt and pension costs and would take effect with the start of fiscal 2022. It passed 36-18.

Pressure for a capital package, the state’s first in 10 years, also grew with backers of “vertical” building projects launching a push to make sure they are heard amid all the talk of funding for roads, bridges, and transit. The coalition includes representatives of labor, education, and healthcare.

“Highway and bridge repairs are vitally important, but any statewide infrastructure plan has to balance those priorities with our need for new schools, modern hospitals and 21st century college facilities. There has to be a healthy mix,” said State Sen. Andy Manar, D-Bunker Hill.

Higher education wants $2 billion just for fiscal 2020. The Illinois Health and Hospital Association is pushing for a $500 million capital program that would help upgrade aging facilities.

The Capital Development Board has reported that state facilities are in need of $7.8 billion for repairs and kindergarten through 12th grade has $9.4 billion in needs.

Manar said details on how to pay for a program that would include a mix of pay-as-you-go funds and borrowing is still under negotiation. A hike in the state’s gasoline tax is among the possibilities.

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