Arc and Not Ready to Kill Off Tax Hike

Candidate for Governor Bruce Rauner states we must grow our way out of our budget
problems as he released more on his plans for the state budget if he were elected.

Story from today’s Chicago Tribune.

Tony

By Rick Pearson and Lisa Black Tribune reporters

Republican governor candidate Bruce Rauner issued his most expansive plan yet to
deal with Illinois’ finances, proposing Thursday to phase out the state’s 2011 income
tax hike, broaden the state sales tax to include some services and freeze local property
taxes unless voters approve increases.

Rauner, a first-time candidate who has been criticized for a lack of specifics in his run
against Democratic Gov. Pat Quinn, released his detailed plan during an appearance in
Schaumburg, saying he aimed to bring prosperity back to “a tax-happy, fee-happy state.”

But the proposal left many unanswered questions, including how Illinois should deal
with one of its most overarching financial problems — a worst-in-the-nation $100 billion
unfunded public employee pension liability.

And although the wealthy equity investor from Winnetka has campaigned as an anti-
tax, anti-big-government candidate, two parts of his proposal belie that theme.

Rauner all but acknowledged that the income tax increase passed by Democrats and
signed by the governor more than three years ago had been a necessary revenue
source and could not be wiped off the books immediately.

“It’s a bow to reality in terms of the fact you can’t just go cold turkey,” said Kent Redfield,
professor emeritus of political science at the University of Illinois at Springfield.

Moreover, Rauner’s move to extend the sales tax to attorneys’ fees and some other
services is recognition of a need to find new revenue sources to finance critical services
in state government, including increased funding for education, as he has advocated.

Rauner’s plan calls for a four-year phaseout of the income tax hike, returning the
personal rate to 3 percent from its current 5 percent and the corporate rate to 4.8 percent
from 7 percent. The plan does not include a schedule for when the rates would change
and by how much.

The tax increase was passed as a temporary measure, and the personal rate is
scheduled to drop to 3.75 percent at the start of next year — even before Rauner would
take office if he won in November.

Quinn tried to get the legislature to make the tax hike permanent this spring but was
unsuccessful. If Quinn wins re-election, he is expected to try again before the rate drops.

The Rauner campaign did not explain what approach the Republican nominee would
take if he is elected: Would he begin his term with the income tax at the scheduled 3.75
percent rate or would he seek to extend the current 5 percent rate for a longer period
before phasing it out?

In an email to the Tribune, the Rauner campaign opened the door to a temporary
extension of the 5 percent tax rate after the election.

“Bruce will get rid of the Quinn-Madigan income tax hike but understands that will
require negotiation with the legislature when he is governor,” Rauner spokesman Mike
Schrimpf said.

The question is a vital one for Illinois finances. The currently scheduled rollback would
cost the state an estimated $4 billion annually.

In an apparent move to offset some of the loss of revenue from a phaseout of the
income tax hike, Rauner offered a list of 32 services — including attorneys’ fees,
advertising sales, warehousing and storage, janitorial services and golf club
memberships— that should be subject to the state’s sales tax. Adding the sales tax to
those services would raise $603 million, based on a state report.

Top state officials and lawmakers have long contemplated an expansion of the sales
tax to services as a revenue-raising idea and to modernize Illinois tax law to reflect the
growing service-based economy.

Quinn, after taking office in 2009, backed one iteration of a tax hike plan that would
have expanded the sales tax to more everyday services. The plan passed the state
Senate but failed in the House. But in March, Quinn used his budget speech to decry
the idea of expanding the sales tax to “everyday services.”

Efforts to broaden the sales tax to services have been unsuccessful in the past
because of the potent lobbying of several affected groups, including barbers and dry
cleaners. Rauner notably exempted such services as well as professional services such
as architects, accountants and engineers, while seeking to impose the tax on attorneys,
a group that includes trial lawyers, a traditionally Democratic-leaning group.

The idea is understandably unwelcome to members of the bar.

“The lawyers won’t pay this tax. They will pass it along to the clients, like the
restaurants do,” said Anthony Licata, partner at Taft Stettinius & Hollister LLC. “It won’t
make much difference to the wealthy clients. But it will hurt the majority of clients who
are working-class people.”

Quinn’s campaign quickly labeled the proposed sales tax expansion the “Rauner
tax,” an echo of a broadened city sales tax plan offered by Rahm Emanuel during his
first campaign for mayor but quickly discarded. Opponents dubbed that the “Rahm tax.”

Rauner also proposed a freeze on local property taxes used to fund schools and
municipalities unless voters approve an increase.

“Taxes are rising dramatically, and voters don’t have enough voice in that,” Rauner
said. “We want to empower local voters to have more of a voice in their school funding
and in their local property taxes.”

Currently, there are various ways that local governments can increase their property
tax levies without voter approval, not the least of which is an allowance for inflationary
growth in spending. Different types of local governments are bound by different taxing
rules.

It was unclear whether Rauner’s plan would freeze property taxes even for those local
taxing bodies that still have leeway to boost taxes now without voter approval. Rauner’s
campaign said further details would be “subject to negotiation with the legislature.”

Top officials of advocacy groups for local governments in Illinois said Rauner’s
property tax freeze proposal was so vague that it was difficult to evaluate.

But Larry Frang, executive director of the Illinois Municipal League, said requiring all
governments to seek voter approval before raising property tax levies would hamstring
their ability to provide services after years of austerity.

“Schools get over half their revenue from the property tax,” Frang said. “Freeze or
don’t freeze, but the fact is costs go up, and not just payroll costs. Natural gas, gasoline,
repairs to broken windows. You need more money each year to do the same things.”

A property tax freeze could severely limit Mayor Rahm Emanuel’s options at City Hall
and Chicago Public Schools, both of which need additional revenue to restore financial
health to their underfunded pension plans that are collectively $28 billion short of being
fully funded.

Although Emanuel has not raised city property taxes and plans to avoid an increase in
his proposed 2015 budget, a plan to shore up two of the city’s four pension funds could
trigger real estate tax increases in each of the following four years. That’s even before he
has come up with a proposed pension overhaul for the other two funds.

CPS, the school district that Emanuel controls, has proposed increasing property taxes
for the 2014-15 budget to the maximum allowed under state law without voter approval,
after doing the same in each of the previous three years. Meanwhile, CPS has relied on a
series of one-time budget fixes to balance the books in recent years as teachers’ salaries
and pension fund payments continue to rise.

While Rauner’s plan seems to recognize the state’s dire finances, the Republican
nominee emphasized that encouraging business growth and job creation was the best
strategy to restore the state’s economy.

“We’ve got to grow our way out of our problems,” he said.

Tony Paulauski
Executive Director
The Arc of Illinois
20901 S. LaGrange Rd. Suite 209
Frankfort, IL 60423
815-464-1832 (OFFICE)
815-464-1832 (CELL)
Tony@www.thearcofil.org