Pritzker’s post-‘fair tax’ fiscal choices range from bad to worse

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With his graduated income tax proposal defeated, Gov. J.B. Pritzker must choose from an array of unappealing options as he works to close a budget gap estimated at nearly $4 billion for the current fiscal year.

Pritzker’s plan to raise an additional $1.3 billion for the fiscal year that started July 1 through higher taxes on wealthier Illinoisans went down just as coronavirus cases soared anew, raising the prospect of more business shutdowns like those that sapped tax revenue last spring. On top of it, the state’s bill backlog—essentially high interest rate borrowing—is trending upward and passed the $9 billion mark earlier this month. And there’s a persistent structural deficit the state has patched for years.

"I, for one, thought back in May that by this time we’d be looking at recovery and how the economy will be getting back to functioning," Chicago Democratic state Rep. Greg Harris says. "I never thought we’d end up in a situation where we are this week where it’s getting worse than it was back in May."

Pritzker already has warned that painful measures will be necessary to balance the state’s books. He’s floated 15 percent cuts to executive agencies, state police, public universities, K-12 education and child care assistance. On the revenue side, he has mentioned a 1 percentage point hike in the state’s current flat income tax rate of 4.95 percent. Illinois also has authorization for short-term borrowing from the federal municipal liquidity facility and fading hope that Congress will bail out state governments.

The tax hike alone would raise $4 billion, and there’s authorization left to borrow roughly $3.8 billion from the federal facility. Across-the-board discretionary cuts could yield billions in savings. But each option is politically fraught and comes with potential repercussions.

Also available is a range of less-draconian actions that might, in combination, generate enough revenue to fill the gap, if they survive the political gantlet.

A group of Democrats proposes closing corporate tax loopholes. Sales, use, income tax and economic development credits and exemptions totaled nearly $8.5 billion in the 2018 fiscal year. In a press release, 14 House Democrats say "all are on the table." Rep. Mike Zalewski estimates an "aggressive approach" to cutting some of those could net $1 billion.

Laurence Msall of government watchdog the Civic Federation has proposed, alongside structural reforms, that the state eliminate the tax exclusion for all federally taxable retirement income. While Pritzker opposes taxing retirement income, the Civic Fed estimates it could net $2.5 billion annually. Broadening the sales tax to apply to the same services Wisconsin taxes, also politically unpopular, could yield $588 million a year, according to the group.

Republican lawmakers say Pritzker must make the first move. House Republican Leader Jim Durkin wrote to Pritzker Nov. 10, saying the governor can make "unilateral cuts where you see fit as you manage the unbalanced budget you signed earlier this year. I suggest you begin with the 6.5% cuts your office directed agencies to identify in 2019."

Statehouse Republicans also have their own list of possible savings, including pension and Medicaid reforms (though that won’t deliver any immediate relief), as well as cuts to non-core service grants, salaries at state boards and commissions, and paid holidays.

Pritzker says there’s little room to cut without pain. Setting aside "federally protected programs, court-ordered obligations and our bond and pension debt," 15 percent reductions to public safety, education and human services spending could cover the gap.

Any such cuts would likely entail layoffs in an already depleted state workforce, adding more people to the unemployment rolls and dampening consumer spending. The number of state employees that don’t work in education dropped nearly 12 percent in the last 10 years, according to the Civic Fed, which says "Illinois ranks third from the bottom in the number of state workers per capita."

But the lesson of Election Day for some is that voters are in no mood for tax hikes, leaving spending cuts as the more politically viable fiscal choice. "If you can’t pass a tax on millionaires, you can’t pass a tax," says Christopher Mooney, a professor of state politics at the University of Illinois at Chicago.

For a sense of the scale of cuts that would be necessary to balance the state budget, he points to "third rails," such as dramatically slicing the $1.5 billion spent on the Department of Corrections or the $1.16 billion spent on higher education. Either move would be complex and face significant pushback from local communities, university alumni and legislators, whose regional economies depend on such institutions. "Close down three, four prisons? Reduce prisons by 25 percent. Eliminate Eastern Illinois University or Southern Illinois University. . . .Sell off their land. Those two things, as examples, would be super hard to do politically, but that’s the kind of money they’re going to look at," Mooney says.

The governor asked leaders of both parties in the House and Senate for a series of meetings Nov. 9. The first, he wrote, should focus on coming "to an agreement on the size and scope" of the deficit of this fiscal year, which ends on June 30, 2021.

There were reasons for optimism. Some revenues, like the sales tax, came in higher than expected—$3.1 billion from July 1 through Oct. 31, or 1.6 percent more than last year—as the state reopened slightly. But the recent COVID resurgence imperils that bounce-back.

Kenneth Kriz, a professor of public administration at the University of Illinois at Springfield, calls for a hard look at how efficiently state agencies are operating. Research suggests transportation and health and hospital functions are less efficient than other states.

"There will be a reckoning at some point," Kriz says, perhaps when the state hits junk ratings or when interest rates skyrocket. "If we want to avoid it, we have to recognize pain. But of course, I know nobody wants to hear that."

via Crain’s Chicago Business https://ift.tt/1mywUHL

November 13, 2020 at 03:46PM

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