With the election of Bruce Rauner as Illinois’ next governor, competing fiscal ideologies have started rumbling down the tracks toward one another. It may be Memorial Day before the dust settles and we see how things come out.
The temporary income tax increases of 3.75 percent to 5 percent for personal and 5.25 percent to 7 percent for corporations will expire at the end of the year leaving a $6.5 billion hole in the state’s Fiscal 2015 budget. Gov. Pat Quinn had called for making the temporary increase permanent but Rauner had run on the proposal to not just repeal the tax increase but to lower rates the rates to 3 percent and 4.8 percent respectively.
With Quinn on his way out the door, any movement to make the temporary tax permanent is expected to come from the legislature where the Democrats hold super majorities in both houses. Dwight Kay, a Republican who represents Illinois’ 112th District, said he didn’t know what to expect.
“The way Madigan (House Speaker Mike Madigan) runs things,” Kay said, “you really don’t know until you walk into the chamber and you find out that the tax increase that has been temporary now is going to be voted on to be permanent.”
Ralph Martire, executive director of the Center for Tax and Budget Accountability, an Illinois think tank, said that could happen during the lame duck session that occurs in January before the new legislature is sworn in, but he doubts that it will.
“I think it’s unlikely and the main reason for that is Governor-elect Rauner ran on a platform that he would not only allow the temporary tax increases to phase down, but he would eliminate them completely and go back to the old 3 percent on the individual tax and 4.8 on the corporate income tax,” Martire said. “So, I’m sure the Democrats are going to say, ‘OK, show us how.’ I don’t see any political reason for the Democrats to extend those temporary tax increases in the House and Senate and let Governor-elect Rauner out of a difficult situation.
“I think Speaker Madigan and (Senate) President Cullerton will be very interested to see what kind of budget proposal Governor-elect Rauner puts together,” Martire added. “I think they’re going to want to see whether or not he comes out and is willing to make a case for maintaining that revenue either on a temporary or a permanent basis.”
The state is in the middle of the FY2015 budget. FY 2016, which will begin July 1, 2015, will be the first budget that Rauner will be able to put together and, according to Martire, there will be $5 billion less in recurring revenue available, pushing the deficit to over $11 billion unless services are slashed.
“I sure don’t think that Gov. Rauner in his first term in office is going to suggest that we cut spending on education, health, social services, and public safety by $5 billion dollars and that is what would have to be cut,” Martire said. “That’s where 9 out of 10 dollars go. So, he’s in a bit of a pickle because of the fiscal policy platform that he laid out during his campaign, which was very much like the fiscal policy platform of the governor of Kansas and we all see how well that’s worked out.”
Martire explained that Gov. Sam Brownback of Kansas had predicted that by cutting taxes, the state would be more economically competitive; it would grow faster; and, would retain its tax revenues due to all the new economic activity.
“Of course just the opposite has happened, Martire said. “Kansas is growing its economy at a far slower rate than its neighboring states and the nation; it is losing jobs; and its deficit has exploded.”
Last summer the CBTA did an analysis of Rauner’s “Bring Back Blueprint: Jobs and Growth Agenda,” which was part of his campaign.
“We tried to do a very impartial review of his stuff,” Martire said, “but we couldn’t get his numbers to work in any way, shape or form. And governing is far different from campaigning. If he puts any sort of decent people around him on his team when he gets into office, he will quickly understand that actually putting together a budget is a little more challenging than simply claiming if we cut taxes, the economy will magically grow so fast that everything will be fine.”
One of Rauner’s proposals that the CTBA did agree with is to levy a sales tax on services. In fact, the CTBA has been advocating it for some time because most states do it and 70 percent of the economy is service oriented. But, according to Martire, Rauner’s proposal did not go far enough.
“We completely agree with that,” Martire said. “We think it’s the right approach. Unfortunately he didn’t quite go far enough and he didn’t really put enough services into the mix. Some of the services he did put into the mix — like professional services — most states don’t tax and I really don’t see it politically happening in Illinois.”
The CTBA analysis of Rauner’s plan projected a net loss of $7 billion in income tax due to his proposed reduction in tax rates. The proposed service sales tax would only generate about $600 million annually, using Rauner’s own estimates, thus digging the fiscal hole even deeper.
Rauner’s plan called for taxing 32 services. Martire says there are 168 services that could be taxed and if Illinois simply taxed the services most other states do, it would generate $2.5 billion in annual revenue.
Kay said that he thought there might be support in the legislature for taxing services.
“If there’s support anywhere for tax increases,” Kay said, “it might be there only because it’s another one of these special carve outs that we’ve had for so many years. But there are a lot of people on both sides of the aisle that want to see a little spending reduction in the areas of waste and abuse before they consider asking for revenue increases.”
And, unless Rauner’s proposed service sales tax is modified to make it more palatable to the legislature, Martire predicts it will fail.
“His expansion is probably not the best design for a couple of reasons,” Martire said. “On the one hand it’s not bold enough because it doesn’t include all the consumer services that it should include so it doesn’t generate nearly enough revenue. On the other hand, it’s too bold because it includes professional services which most states don’t tax. Hence, it’s not politically realistic and it certainly will not be part of any final bill that passes.”
Kay, however, is hopeful that the legislative leaders, both Democrats, will try to work with the new Republican governor to dig the state out of its fiscal morass.
“Bruce Rauner is a pretty smart guy when it comes to doing the math, “Kay said. “I would think that Cullerton and Madigan would want to get this state back up on its legs; provide opportunity and security for the people of the state; and do it quickly. My hope is that everyone says, ‘let’s work together.’ That would be novel,” Kay added, “That would be very novel.”