Arc and State Income Tax

The biggest issue facing disability and human services advocates is the state income tax
which is scheduled to expire Dec. 31, 2013. If now extended, there will be a $5 billion hole
in the state budget. Where does your legislator stand on supporting continuation of the
state’s income tax? Story from Chicago Tribune:  http://eedition.chicagotribune.com/Olive/ODE/ChicagoTribune2/

Tony

SPRINGFIELD — The harshest Republican critics of a new law to wipe out the state’s $100
billion government worker pension debt argued that the plan should have saved more
money or Illinois’ temporary income-tax increase that’s set to expire will never go away.

A look at the state’s finances, however, shows it’s a good bet the tax hike will stick around
whether or not lawmakers approved last week’s major overhaul of the retirement systems. If
lawmakers allow the tax increase to expire as scheduled at the end of 2014, the state will lose
about $5 billion a year. That’s one-seventh of the state’s $35 billion operating budget.

“We’ve got a very, very, very big hole just around the corner under current tax law,” said Sen.
Daniel Biss, an Evanston Democrat with a bachelor’s in math from Harvard and a doctorate in
math from MIT. “I can’t think of a pension reform package in the world to make up that lost
revenue. I don’t think the arithmetic is there.”

The pension law Democratic Gov. Pat Quinn signed Thursday does provide the state some
budget relief. If the measure didn’t pass, the state was expected to be on the hook in the new
budget for about $6.94 billion in pension costs, an amount that was supposed to go up steadily
for years.   

Changes in the new law mean the state could free up as much as $1.3 billion a year from
employee pension spending, according to legislative calculations just before the final bill was
called for a vote.

It would be risky for lawmakers to count on that relief until the pension law works its way through
the courts in what is expected to be a monumental legal fight by labor leaders challenging the
law’s constitutionality. But next year is an election year, and as lawmakers noted during the
pension debate, the General Assembly has not developed a reputation for fiscal restraint over
the years.

Expert analysts are still unpacking the financial intricacies of the newly minted 327-page pension
law that many rank-and-file lawmakers had less than a day to read before they narrowly voted
Tuesday to send it to Quinn.

The new law raises the retirement age for young workers, scales back cost-of-living increases
for retirees and skips up to five of those annual adjustments, depending on a person’s age.
Longtime employees with small pensions get to keep in place 3 percent compounded annual
increases until they hit a level based on years worked. An optional 401(k)-style plan would be
available for some of those who would like a bigger hand in managing their money. And workers
would see a 1-percentage-point decrease in the amount of money taken from paychecks to
support the pension system.

During debate on the bill, Rep. Tom Morrison, R-Palatine, made it clear he had seen enough
financial and political math to make his own judgment.   “It was a crisis three years ago,” Morrison
said. “It will remain so today. That will equate to a tax increase on the general public.”

It’s been nearly three years since Democratic majorities in the House and Senate approved the
income tax hike during a lame-duck session. The move raised the personal income tax from 3
percent to 5 percent, a 67 percent increase in the rate.   At the end of next year, what was billed
as a temporary income tax hike will by law drop to 3.75 percent unless lawmakers and the
governor decide to continue it.

Oddly, the income tax would be cut in the middle of the state’s budget year. That gives planners
a bit of a cushion, though the expiration of the tax hike still is estimated to take $2.2 billion out of
state coffers for the final six months of the budget year that starts July   1.

Quinn will have to account for that major loss in revenue in the new spending plan he’s scheduled
to unveil in February, a month before Republicans pick a nominee for governor in the primary
election. The usually loquacious governor, who in 2010 ran for election openly in favor of
raising the income tax, has chosen to dodge the question of whether he wants to keep the higher
tax rate in place as he runs for reelection next year.

“We’ll take that up in the coming year,” Quinn said at his Capitol office last week. “There’s a
chance to address all kinds of budget issues when budget time comes up in the next fiscal year.”

The should-it-stay-or-should-it-go tax hike question is likely to be a big issue in the race for
governor. The fate of the tax hike will have a major impact on whoever is sitting in the
governor’s office come 2015. That’s supposed to be the first full year of a lowered income
tax and legislative budget forecasters predict a $4.8 billion loss in revenue. It’s a tough number
for even the biggest budget cutter to hit.

The politicians in Springfield have a few paths: Pass a half-year budget. Stick money in lump
sums rather than line items so dollars are harder to track. Tell voters the candidate for governor
who wins the November election should get to shape his budget. Delay payment of more bills and
so forth.

Republican Rep. Michael Fortner of West Chicago said lawmakers could have tried to pass a law
that cut into pension spending to generate enough savings to allow the tax hike to go away, but
then the pension systems would not have been fixed. For example, the law might have set up a
process where only 70 percent of the pension debt was erased instead of 100 percent, but then
the state’s mission would not have been complete, he said. It also may have failed in court, he
added.   Fortner, who teaches physics at Northern Illinois University, is widely credited at the
Capitol with coming up with a way to accelerate payments on the pension debt and save billions.
But Fortner voted against the pension legislation, citing reasons that included concerns that the
funding guarantee was too weak.

There also is the question of what things might look like if deeper budget cuts are made.   Rep.
Elaine Nekritz, a Northbrook Democrat who was the pension point person for House Speaker
Michael Madigan, said none of the retirement overhaul bills considered would have cut into
pensions so deeply that the state would have received a dollar-for-dollar savings equal to the
$4.8 billion lost income in tax revenue. Such a move would “decimate” education spending and
hurt the pensions themselves, she said.

“That would require some really, really deep cuts to retirees,” Nekritz said, “And active
employees
would expect almost no pension when they retired if we were to do that.” rlong@tribune.
Twitter @RayLong

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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