CHICAGO - Illinois Gov. Pat Quinn released a fiscal 2015 budget and five-year fiscal plan that relies on making a 2011 temporary income tax hike permanent.
He sought in his budget address Wednesday to make his case for cementing the 67% tax hike, which was billed as a "temporary tax" when he pressed for its passage in 2011.
"Illinois is in a stronger financial position now than we were five years ago and now is the time to end the era of fiscal cliffs and secure Illinois' long-term financial future," Quinn said, listing what he described as the state's fiscal strides including passage of pension reforms in December.
Quinn argued the state can't afford to let the tax partially expire as scheduled in January, midway through fiscal 2015, without crushing cuts to education and other state programs and damaging fiscal accomplishments including a reduction in the state's massive bill backlog.
"If action is not taken to stabilize our revenue code extreme and radical cuts will be imposed on education and critical public services," he said.
"We cannot stand by and allow savage cuts to schools and these critical services to unravel the progress we've made over the past five years," Quinn said.
The state faces an estimated loss of $1.6 billion in the next fiscal year if the higher rate expires. That figure is projected to rise to $4 billion in fiscal 2016 when it applies over a full year.
Lawmakers recently voted to cap general fund spending at $35 billion assuming the tax rate goes down on Jan. 1. If lawmakers agree to Quinn's proposal, that figure would rise.
The governor released what’s in effect two fiscal 2015 budgets, one which reflects the impact of the tax expiration and one which anticipates its continuation. Under law, the governor must propose a budget based on enacted revenues. The not recommended plan includes a $34.9 billion general fund which results in $3.6 billion of red ink if spending is not cut and his recommended version calls for a $38.6 billion general fund. The general fund is reduced to $32.2 billion when some expenses are subtracted including nearly $1.3 billion for property tax relief and $480 billion to pay down the bill backlog, according to assistant budget director Abdon Pallasch.
While Quinn's Democratic Party enjoys control of the General Assembly, the tax vote could prove a tough sell for some lawmakers, as all House seats are up for election in November as well as 19 of 59 Senate seats.
Quinn, also up for re-election, faces a formidable opponent in wealthy, self-financed businessman Bruce Rauner. He and his fellow Republicans in the General Assembly support letting the tax roll back as scheduled. Rauner has not outlined how he would adjust for the lost revenue.
To help make the tax hike palatable, Quinn proposed giving homeowners about $500 in additional property tax relief annually by restructuring property tax deductions on state income tax filings. The move raises the cost of the deduction for the state to $1.25 billion from $650 million. The state would also double the earned income tax credit over the next five years to benefit lower paid taxpayers.
Quinn also proposed business tax credits for job training and increased funding for early childhood education and $50 million for college aid to low income students.
The proposed budget is part of a larger five-year plan Quinn promoted as a path to fiscal stability. The plan calls for investing $6 billion in public classroom spending while chipping away at the state's bill backlog. The five-year plan also protects local government revenue sharing levels over the next five years.
Quinn also is pressing to strengthen existing spending caps that limit spending growth and to build up budget reserves, but officials did not immediately provide more detailed information on those proposal. Such measures are moves rating agency analysts "take notice of," said acting budget director Jerry Stermer.
Quinn also plans to establish a bipartisan group to craft a new five-year infrastructure program as a follow up to the state's $31 billion bond-driven Illinois Jobs Now program which is winding down.
Rauner attacked the proposal to make the tax permanent as a broken promise ,echoing comments from Republican lawmakers who have longed expressed skepticism that Democrats would allow the tax to expire.
"After five years of Pat Quinn's failed leadership, we have record tax hikes, outrageously high unemployment, massive cuts in education, and there's still a giant budget mess in Springfield," Rauner said in a statement today.
Under the scheduled rollback, the individual income tax rate falls to 3.75% from 5.0% and the corporate income tax rate falls to 5.25% from 7.0% on Jan. 1.
The 2011 tax increase raised the personal rate to 5% from 3% and the corporate rate to 7% from 4.8%.
The state's books remain strained by a structural imbalance illustrated by a $5.4 billion backlog of bills that was expected to be carried over into the new fiscal year. Though substantial, it's down from a high of $9 billion several years ago. Quinn’s plan would lower the $5.4 billion pushed off to next year to $4.9 billion.
The state carries the weakest general obligation rating among states at the A-minus level across the board, and it's not expected to improve unless the state shores up its budget and the court validates the pension reforms.
The political dilemma for Quinn is illustrated by a recent academic poll which found state residents favor letting the income tax hike happen on schedule but also don't want to cut spending on education, human services, or public safety.
Quinn led off his speech by ticking off fiscal strides since he took office in 2009. They include tackling pension reform, making $5.7 billion in spending cuts, passage of new union contracts, and legislation reforming workers' compensation and retiree healthcare reforms, as well as passage of the $31 billion capital program.
The state took a big leap toward stabilizing its fiscal foundation with passage of a pension overhaul that will trim an estimated $145 billion in state contributions over the next three decades.
Investors have rewarded the state through lower interest rates recent bond sales, but rating agencies have not acted with the exception of Standard & Poor's. It shifted the state's outlook to "developing." Fitch Ratings and Moody's Investors Service still assign negative outlooks.
The pension changes, if they stand, are estimated to trim $145 billion off state payments over the next few decades and stabilize a system saddled with $100.5 of unfunded liabilities.
The budget does not assume any immediate savings in its annual pension fund contributions due to the legal challenge filed by unions, retirees, and workers. If upheld, the state anticipates saving nearly $1.2 billion in fiscal 2016, $1.26 billion in fiscal 2016, and nearly $1.4 billion in fiscal 2018.
Pension contributions in the next budget rise by $255 million to $6.2 billion.
Fitch in a recent report wrote: "If pension reform moves forward and the state takes credible action to achieve structural budget balance beginning in fiscal 2015, we believe a higher rating would be warranted." Absent both, a downgrade could occur.
Moody's wrote: "Failure to address impending revenue loss from partial sunset of 2011 tax increases" or "significant further deterioration in pension funded status" could drive a downgrade.
"If pension reform moves forward and the state takes credible action to achieve structural budget balance beginning in fiscal 2015, we believe a higher rating would be warranted," Standard & Poor's said.
