A Taxing Time: Even After the Passage of the Income Tax Increase, Lawmakers Have Plenty Left to Do
Although legislators passed a tax increase in the last day of the lame duck session, they allowed other components in an overall budget and reform plan — some of which would have expedited long overdue payments to vendors, schools and social service providers — to fall apart.
As the members of the 97th General Assembly embark on a new two-year legislative session, piecing together some the leftover parts of that plan will likely be their first order of business.
After floating several versions of a tax plan, legislators passed and Gov. Pat Quinn signed a measure that raised the personal income tax rate from 3 percent to 5 percent and the corporate income tax from 4.8 percent to 7 percent. Under the legislation, both rates will drop after four years, to 3.75 percent for personal income tax and to 5.25 percent for the corporate income tax. The plan is expected to bring in roughly $6.5 billion in its first year.
Chicago Rep. Barbara Flynn Currie, who sponsored the tax bill, estimates that a family of four with an income of $40,000 will pay roughly $800 more a year under the initial increase.
Shortly before legislators approved the increase, David Vaught, Quinn’s budget director, warned that without new revenue a downgrade of Illinois’ bond rating to “junk” status was imminent. If that were to happen, the state would have to pay high interest rates on borrowing and could have a harder time selling bonds in the future.
As the state brings in more money, legislators have to stick to set spending limits. Spending will be capped at $36.8 billion in fiscal year 2012, $37.5 billion in FY 2013, $38.3 billion in FY 2014 and $39.1 billion in FY 2015. If lawmakers spend more, the tax increases are nullified. It will be up to the Illinois auditor general to determine if the state has overspent. Democrats describe that provision as the “hammer” that will keep future budgeting in line. Both chambers changed rules to require a three-fifths vote on any legislation that would increase the limits.
The spending caps, coupled with the new revenue from the tax increase, are intended to address the state’s structural deficit over the next four years. Demo-crats argue that the growing cost of the pension systems and health care will force legislators to make cuts to bring the budget in under those limits. “We already know looming pension contributions and Medicaid will press against the new cap on government spending. As the next General Assembly starts business, we must begin to find nearly $300 million in cuts to comply with the spending cap. And the General Assembly will likely have to do the same the year after, and the year after that, and probably the year after that,” Senate President John Cullerton said in a written statement.
Republicans say Democrats started with an inflated base figure when they created the caps. They see the limits as built-in spending growth for the next four years. House Minority Leader Tom Cross calls for no new spending in the coming years. “They have codified $6 billion in spending increases. They’ve codified those.”
Cross doubts the notion that the tax increases are temporary. “I think it’s clearly false.” He says the growth would put spending at a level that to be maintained, would require an extension of the higher tax rates beyond the planned four years. “It’s kind of absurd that you’ve got a 2 percent growth in every year. … We can’t sustain that.” No Republicans voted in favor of the tax increase.
A plan to borrow $8.75 billion, which would have been paid off over 14 years, to pay down the more than $6 billion backlog of unpaid bills for this fiscal year failed to get the 71 votes it needed to pass. Spring Valley Democratic Rep. Frank Mautino, who sponsored the borrowing bill, says if the measure had passed in January, the state could have started sending out checks in March.
Democrats describe the plan as a “restructuring of debt” that would save money in the long run because the state would pay less interest on the borrowing than it does on late payments to vendors. “Most people who own homes, in the last five years, have refinanced. And why? Because they could do it at a lower interest rate, and they’re all saving money. Why shouldn’t the state do the same? In fact, we have a responsibility to do the same,” says Skokie Democratic Rep. Lou Lang. “All we’re doing is exchanging borrowing for debt. We still owe the money.”
Republican leaders say they are willing in the new session to consider a borrowing plan, which would need Republican votes in both chambers to pass, to pay off some of the bills. But they want some things in return for their support.
“We want our bills paid. We know that vendors need to be paid,” says Cross. “One of the things that we’re going to talk about is maybe the size of that borrowing [and] the length. We’re going to talk about some cuts, and we’re going to talk about some other fundamental things that we need to talk about.”
Potential reforms to the state’s workers’ compensation system will likely play into the negotiations over the borrowing plan. All four legislative leaders count bringing down the cost of workers’ compensation among their top priorities for the new session.
Lawmakers pushed a reform package in the waning days of the last session, but it was not called for a floor vote in either chamber. Representatives of organized labor and the health care industry lined up to oppose the bill, which would have lowered the amounts employers must pay doctors to treat injured workers.
The legislation also would have let employers choose the doctor who assesses and treats an employee making an injury claim. If not satisfied with the doctor, the employee could visit another doctor and obtain referrals to other specialists from that doctor, and the employer would cover the cost. However, if the employee wanted a second opinion beyond that doctor or the referrals, the employer would not have to pay for it.
Senate Minority Leader Christine Radogno calls the effort to reform workers’ compensation “one of the most serious attempts to deal with the issue that we’ve seen in a long time.” She adds, “We just didn’t quite get there with the few weeks we had to work on it.”
Radogno says the intricacies of such a large system make it difficult to change. However, she emphasizes the importance of bringing down costs because she says employers list the expense of workers’ compensation in Illinois as one of the top reasons for wanting to take their business elsewhere.
“It is a very complicated system, and there are a number of interest groups that are impacted by it,” Radogno says. “It has become a very large system, delicately balanced, and anytime you try to change one piece of it, it throws the whole thing out of balance. So what we need to get to is a point where the reforms are balanced across all the interest groups, and we still make sure that the injured worker gets good care, fast care, cost effectively.”
While any pain the reforms may cause should be as evenly distributed as possible to all stakeholders, Radogno thinks the days of changing the system through the so-called agreed bills process, which creates a plan that is negotiated and agreed upon by the major interest groups, are over.
“To remove it from the interest groups and have the legislators actually listen to the interest groups and make the final decision is a huge step forward.”
While considering workers’ compensation changes, legislators also looked to reform Medicaid and education. The General Assembly approved in January a bipartisan plan to rework the Medicaid program, which provides health care to low-income residents.
However, the Senate put the brakes on education reforms after teachers’ unions asked for time to work out a plan. “Give the people who will have to implement these reforms time to figure them out. Not months. Not years. But not days either. That’s not right. But it does make everyone watching this today wonder what the motivation is — real change that improves education for kids, or something else,” Audrey Soglin, executive director of the Illinois Education Association, said at a committee hearing on proposed reforms.
As part of Illinois’ failed bid for Race to the Top, a competitive federal education grant program, the General Assembly set new standards for teacher evaluations, which call for student performance to play a large role in the way educators are rated.
Some reform groups want to see the results of those evaluations become the primary factor in administrative decisions, such as firings and layoffs. Currently, teacher seniority plays a large role in such choices. Another proposal would have limited teacher unions’ ability to strike.
Unions have worked up their own plan, which overlaps some proposals from reform organizations. It also calls for expanded teacher mentoring programs, training for school board members and a “student bill of rights.” Maywood Democratic Sen. Kimberly Lightford, who was a key negotiator in new education laws passed as part of the state’s Race to the Top grant proposal, says she hopes to merge ideas from both groups.
Radogno thinks the new General Assembly could potentially pass education reforms in its first year.
Republicans and Democrats are also both eying more changes to state pension systems. The General Assembly passed reforms to the current system, which went into effect at the beginning of this year.
Cross says those changes do not go far enough. He believes Illinois needs to adapt the benefits for employees that were hired before the changes were put into place. He says the Constitution protects the benefits that retirees and current employees have earned, but the state must make changes to the future benefits that current employees can earn.
Cross says he intends to introduce a bill that would include recommendations from the Civic Committee of the Commercial Club of Chicago. Under the proposal, the state would either contribute less to workers’ current plans, or employees could choose a “defined contributions plan,” which is similar to a 401(k). The state would then match whatever each employee opts to invest in his or her retirement.
He acknowledges that some may perceive his proposals as anti-worker or anti-union, but he says: “It is not at all meant as an attack on current employees.”
He adds, “This is a discussion about saving a pension system.” Cross says it will be a difficult discussion but one that would be “criminal” for legislators not to have.
Cullerton disagrees that the legislature can change future benefits for current employees. He says the state can only make changes to the system for future employees. “I am definitely looking at savings in pensions, but you can’t do it in an unconstitutional way.”
Cullerton does agree with Cross on one point: Making sure that Illinois can meet its pension obligations is a top priority.
“I don’t view stabilizing the pension system for existing employees and retirees as being anti-union,” Cullerton says of the reforms that were passed last year.
Cullerton says he is interested in changing the way the teachers’ retirement system is funded. He would like to shift some of the costs away from the state by requiring local government to contribute to teachers’ retirements, similar to what they currently do for firefighters and law enforcement.
House Speaker Michael Madigan says one of the most important things lawmakers can do in the new session is to avoid unraveling the work that the General Assembly has already done.
“We have to learn to live within our means. We cannot backtrack on those changes that we made in the Medicaid system. We cannot backtrack on those changes we made in the pension systems,” Madigan said in a speech to newly elected House members after they were sworn in. “And that’s going to require courage, and that’s going to require people to say no.”
Illinois Issues, February 2011