The Chicago school system will lose. City government in Decatur will feel the pinch. And the cash-strapped state of Illinois will be out hundreds of millions of dollars.The sudden, unexpected revival of a federal economic stimulus plan earlier this year dealt a major blow to Illinois state finances. Illinois schools, municipalities and other local governments will feel the bite, too. But the biggest loser will be the state’s general revenue fund.
The Illinois Department of Revenue estimates a $216 million reduction in state revenue and a three-year loss topping $590 million. Local governments, including school districts, stand to lose $149 million in the first year and $400 million over three years.
“It’s a big hit,” says Stephen Schnorf, director of Gov. George Ryan’s budget bureau. House Majority Leader Barbara Flynn Currie, a Chicago Democrat and a senior member of her chamber’s Revenue Committee, agrees. “Given that everybody talked about the way-scaled-back nature of this package, I was amazed that it turned out to have such significant repercussions,” she says.
The eye-popping figures have placed the issue near the top of the to-do list in the budget-driven spring legislative session. No question, decisions about ways to handle the fiscal fallout will make a big difference in the state budget, as well as in the spending plans of school districts and local governments throughout Illinois.
Why will the state lose? The reasons for this are both simple and complex. The stimulus package includes several federal tax breaks for businesses, but the one that will have a major impact on government finances is a provision allowing companies to accelerate the depreciation of their assets. That will mean larger and faster deductions from corporate income. Here’s the clincher: Because the Illinois corp-orate income tax is linked to federal taxable income, reductions in federal corporate income taxes automatically translate into reductions in state revenue from corporate income taxes.
Why will school districts and other units of local government lose? Partly it’s because of the way Illinois distributes money to those governments. Under the local government distributive formula, the state automat-ically sends a portion of state income tax dollars to municipalities and counties based on population. The Department of Revenue estimates the one-year reduction at $25 million.
The big dollar loss for local governments, though, will result from the decline in the corporate personal property replacement tax. This was a reform envisioned by the 1970 Illinois Constitution. The change eliminated the personal property tax, which was levied on assets ranging from automobiles to machinery located in factories, and replaced it with an income tax known as the corporate personal property replacement tax.
The federal stimulus package will result in estimated reduction in the corporate personal property replacement tax of $125 million in the first year. Proceeds from that tax are distributed to any local government that had a personal property tax in 1977 through a formula based on that local government’s share of the statewide total. A district that had 0.1 percent of the personal property tax then gets 0.1 percent of the corporate personal property replacement income tax proceeds today.
In short, any change is magnified for urban areas such as Danville and Peoria that had more equipment-filled plants and inventory-packed ware-houses decades ago. The city of Decatur, for example, stands to lose $315,000 in the first year. School districts and local governments in Rock Island County stand to lose a combined $3.8 million a year.
Normally, school districts would not have to worry. Illinois State Board of Education spokeswoman Kim Knauer says such reductions are offset for most school districts a year or two later by the intricacies of the state school aid formula. However, the size of this reduction would require the state to pump tens of millions of dollars into general state aid — money the state doesn’t have now. Without a massive additional infusion of state dollars, the state-guaranteed per-pupil spending level for all districts will have to go down to make up for the money that will have to go to those districts experiencing a decline in the personal property replacement tax.
Other local governments will simply be out the money. They would have to raise taxes or cut services.
As for the state’s coffers, Schnorf says the federal government’s action was one more problem in a year of problems. The $216 million first-year loss is part of what some estimate will be a $1 billion shortfall in general revenue.
Still, the problems caused by the stimulus package are not permanent. Eventually the losses would stop and could even reverse. If businesses receive benefits from accelerated depreciation early on, they will not have the values to depreciate and deduct later, explains Mike Klemens, spokesman for the Illinois Department of Revenue. Ultimately, they might pay more in corporate taxes unless Congress changes the law again.
Yet the immediate effects of the federal law are severe enough that some legislators and interest groups want to unlink the state corporate income tax from the federal corporate income tax, something referred to around the Statehouse as “decoupling.”
Decoupling proponents include the American Federation of State, County and Municipal Employees Council 31, which represents public employees. “Illinois should not let itself be penalized and slash services because the federal government reduced federal corporate income taxes,” union officials said in a position paper.
But the idea has its critics. Douglas Whitley, a former director of the Illinois Department of Revenue who now is president of the Illinois State Chamber of Commerce, says he would oppose decoupling. He says the state should follow the federal lead. “Every state in this union has to pull together to help the nation’s economy as a whole,” he says. “When the Congress acts, they’re trying to act in the best interests of the nation as a whole. And part of our obligation as a part of the United States is to recognize that they’re trying to make decisions to improve the economy of the whole country.”
Further, Whitley argues that decoupling would discourage businesses from creating jobs in Illinois and make the income tax system too complicated.
Currie disputes both points. “Very few business decisions are made based on what the Illinois income tax liability will be,” she says, adding that corporations could adjust to a tax system that’s a “little more complicated.”
The political reality is that some rank-and-file legislators in both parties are anxious to avoid the stimulus-created budget pain, especially for local governments. Sen. Frank Watson, a Greenville Republican and an assistant majority leader, says Whitley’s position might not prevail. And Sen. Denny Jacobs, an East Moline Democrat who serves on his chamber’s Revenue Committee, says decoupling needs to be part of the end-of-session revenue and spending package.
“We’re going to have to remove ourselves from the federal bill even though the [state] chamber is opposed to it. We cannot afford both on the state level and on the local level to take that big a hit.”
For his part, House Speaker Michael Madigan, a Chicago Demcorat, says he’s concerned about politicizing the issue. If decoupling is widely viewed as a tax increase, it could make it much more difficult to enact. In fact, Madigan won’t even address Whitley’s argument that decoupling would amount to a tax increase.
“For someone to step out and say X, Y or Z about any of that just encourages others to come up with political responses,” he says. “This is a dire budget situation, and if people are interested in fashioning a decent budget, they ought to avoid politicizing the thing.”
Anthony Man is Springfield bureau chief for Lee Enterprises Inc. newspapers.
Illinois Issues, May 2002
