CHICAGO — Illinois Gov. Pat Quinn will lay out a fiscal 2015 budget proposal Wednesday that will reveal how he wants to deal with the steep loss of revenue looming from a scheduled income tax rate rollback.
The Chicago Tribune early Wednesday reported that Quinn's budget makes permanent the 2011 tax increase. As he faces re-election, the governor hopes to sell lawmakers and the public on the plan by including property tax relief for homeowners through a $500 refund. He will try to make the case that the state can't afford the revenue loss and its impact on education funding and other state programs. The report quotes an anonymous source briefed on Quinn's plan but without authority to disclose the details.
"I'll lay out with specificity, with concrete details exactly what the budget's going to be in the coming fiscal year," Quinn said Monday.
"Matter of fact we have a blueprint for the coming five fiscal years . I think it's important we have a robust discussion on that issue," he said. Lawmakers have capped state general fund spending at $35 billion next year.
The incumbent Democratic governor's stance will be closely watched by investors who are waiting for Illinois to lay out a strategy to account for the expiration of a temporary tax hike midway through the fiscal year on Jan. 1.
The state faces a loss of $1.6 billion in revenue in the next fiscal year due to the partial expiration of the 2011 increases. The loss rises to $4 billion in fiscal 2016, which could result in dire spending cuts or a spike in the state's unpaid bill backlog. The state is expected to close out the current fiscal year with about $5.4 billion of unpaid bills but that is down by a few billion from recent years.
Rating agency analysts have called the expiring tax a key rating factor as they assess the state's general obligation credit, and it likely will provide campaign fodder for Quinn's Republican opponent, Bruce Rauner, in the November governor's contest.
The state's precarious fiscal position was bolstered by passage of a pension overhaul in December but those changes are being challenged by public sector employees and labor. Market participants have called the income tax rollback the other remaining hurdle to stabilizing state finances.
The state carries the weakest rating among states at the low single A level with Fitch Ratings and Moody's Investors Service assigning a negative outlook and Standard & Poor's assigning a "developing" outlook.
"The state's deficit problem is huge and growing, requiring tough choices. We are not likely to make the necessary changes in a single year. Instead we need to define a credible path toward fiscal balance," Richard Dye, of the Fiscal Futures Project at the University of Illinois Institute of Government and Public Affairs, wrote in a piece published Monday.
"There are no easy answers. Solutions to our problems will require pain — probably both tax increases and spending cuts," he added.
In addition to extending or making permanent the higher tax rate, the state's options include replace the revenue through other taxes or an overhaul. It could impose taxes on retirement income which it currently does not or shift from to a flat income tax to a graduated one based on income.
On Tuesday, state Sen. Don Harmon, D-Oak Park, unveiled at a news conference a proposal to shift to a graduated income tax with three tax brackets. The rates would range from 2.9% for income up to $12,000, 4.9% for income up to $180,000, and 6.9% for those with higher income.
Rauner supports letting the rollback occur on schedule but he has not said how he would make up the revenue loss.
The political quagmire for Quinn is illustrated in a new poll from the Paul Simon Public Policy Institute at Southern Illinois University which found state residents favor letting the income tax hike happen on schedule but don't want to cut spending on education, human services, or public safety.
State agencies and educators have warned in recent legislative hearings that deep spending cuts would gut school district teacher staffing levels, programs for the poor, elderly, mentally ill, and disabled, and result in the loss of federal matching funds. Several prisons could be forced to close and state troopers laid off. Republicans have countered that the message is an attempt to lay the groundwork for an extension of the taxes or new taxes.
Absent new revenue or spending cuts, the state could push up its bill backlog.
"Illinois has dealt with its general funds deficits by delaying payments to vendors, social service agencies and local governments in order to pay those bills from the next year's revenue," the Civic Federation of Chicago noted in a recent report. "It is unclear how the state could continue to provide basic government services if unpaid bills were allowed to grow."
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 federation has recommended a five-year plan to structurally balance the state budget. It calls for delaying the tax hike expiration and then phasing in a partial rollback over the next three years.
The state's improved investor appeal is at stake. After the pension bills passed, spreads narrowed on penalties demanded on Illinois bond sales.
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.
Many investors has said they feel the state's bonds will only build in value but that perception hinges on the pension reforms being legally upheld and the state improving its budgetary position.