In the waning hours of the lame duck legislative session, the Illinois General Assembly approved a temporary increase in the state income tax along with a series of spending restrictions designed to ensure that the new revenues go towards paying down the state's massive debt and bringing financial stability to our state. The passage of this revenue package is the culmination of the efforts of the Responsible Budget Coalition, an unprecedented coalition of anti-poverty, human services, education, labor, good government, seniors and faith-based advocates. See abetterillinois.com.
Under the legislation, S.B. 2505 amdt. 3, the individual income tax will increase from 3 to 5 per cent for the tax years 2011-2014, revert to 4 per cent for the next ten years, and then go to 3.5 percent thereafter. The corporate income tax will increase from its current level of 4.8 per cent to 7 per cent for the tax years 2011-2014, revert to 5.6 per cent for the next ten years, and then go back to 4.8 percent thereafter.
It is estimated that increasing the individual income tax from 3 to 5 per cent will yield over $6 billion in revenue. Increasing the corporate income tax to 7 per cent will yield another $1 billion.
The legislation includes a number of spending restrictions designed to ensure that the new revenues go towards paying down the state's debt and addressing the structural imbalance that has resulted from state revenues failing to keep pace with needed expenditures. These spending restrictions are:
•A hard cap on spending for the next four years. The cap will be $36.8 billion in year one (FY12), or 10 per cent more than FY11 estimated spending of $33.5 billion, and will then increase by 2 per cent each year for the following three years. The reason that the first year cap in 2012 is higher is so that it can include all of the spending lines from 2011 that the state simply did not pay - the pension payment, bills to providers, making up for the loss of federal stimulus funds, debt services and more. Once that "base" is set, then limits for the three following years are very tight.
•The hard cap encompasses all state spending, including general funds, continuing appropriations (pensions), and general funds transfers.
•Within 60 days after the General Assembly passes a law authorizing state spending from state general funds (e.g., the state budget), the Illinois Auditor-General will have 60 days to review the legislation and determine whether the spending in the bill exceeds the hard cap. If he determines that it does, then the General Assembly has 45 days to reduce spending below the cap or, failing that, the Governor then has 15 days to do so. If spending is not reduced below the cap, then the individual income tax rates revert to the existing rates of 3 per cent for individuals and 4.8 per cent for corporations.
•The spending cap can be exceeded only if the Governor declares an emergency and neither the Comptroller nor the Treasurer notifies the General Assembly that they do not concur with the Governor that there is an emergency.
•Statutorily-mandated spending of any kind may be reduced by the Governor if he determines that doing so is necessary to remain within the annual spending cap.
The cumulative effect of these spending restrictions will require further assessment, so stay tuned for a future blog on that topic. Nevertheless, the magnitude of the spending cuts that would have been required had the revenue package not been approved are unimaginable and would have imposed grave hardship on millions of Illinoisans and consigned our state to a very bleak future. Illinois would also have begun defaulting on loan payments and missing payrolls, becoming a financial pariah.
The revenue package also provides that in 2015, after the spending restrictions expire and the individual income tax reverts to 4 per cent, a defined amount of funds will be set aside for education and the same amount will be set aside for human services. The education and human services set asides will be 3.1 per cent of increased revenues from 2015-2024 and 3.6 per cent thereafter.
The revenue package approved by the General Assembly is also noteworthy for what it did not include. Despite the fact that Illinois' individual income tax is highly regressive, with all taxpayers subject to the same 3 per cent rate, the final package did not include any provision to lighten the burden on the working poor, such as an expansion of the state's earned income tax credit. On the positive side, while the package includes tough restrictions on spending over the next four years, they are temporary and will expire. The General Assembly did not pass a proposed constitutional amendment that would have permanently locked in spending at levels that would have eventually led to drastic cuts in services.
In closing, nothing threatens a politician's career more than voting to raise taxes, especially an increase of this magnitude. In the end, the members of the General Assembly who voted in favor of the revenue package, and its leadership, must be lauded for their courage in doing the only responsible thing they could do to restore financial stability to the State of Illinois and ensure that it lives up to its obligations and does not forsake its children, its teachers, its mentally ill and developmentally disabled, and all of its other most vulnerable residents. The Senate vote can be found here.
The House vote is here.
Be sure to thank those who voted yes and rally to their defense if they are attacked for their vote.