Illinois Close to a Budget After Two Years of Drama

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By Michael J. Bologna

The Illinois General Assembly is poised to enact the first real budget the state has seen in two years.

The action comes despite a barrage of criticism July 5 from Republican Gov. Bruce Rauner, who accused Democrats of sticking taxpayers with a 32 percent income tax increase.

House Speaker Michael Madigan (D) scheduled a House session for July 6 aimed at overriding Rauner’s vetoes of three revenue and spending bills establishing a budget for Fiscal Year 2018. Madigan will have to rely on some votes from the right side of the aisle, but a full override is expected because the crucial $5 billion tax increase bill got support from 15 Republican House members on July 2.

“House Democrats look forward to working with our colleagues on the other side of the aisle to begin healing the wounds of the last several years,” Madigan said in a statement.

Rauner called on House members to abandon Madigan during a briefing with reporters in Chicago. As he has done since taking office in 2015, Rauner pleaded for a statewide property tax freeze and other government reforms before any votes on a final budget.

“Raising taxes without fundamentally changing our system, so we have a better future, will be a disaster,” Rauner said. “We cannot let this occur. We must stand against this tax hike.”

Junk Bonds?

Illinois hasn’t had a conventional budget since June 30, 2015. Political bickering between Rauner and Democrats controlling the House and the Senate has left the state with a $15 billion backlog of unpaid bills and $130 billion in unfunded pension liabilities.

Several reporters noted that debt rating agencies Fitch Ratings Inc., Standard & Poor’s, and Moody’s Investors Service, Inc. had threatened to downgrade Illinois’ debt to junk status if lawmakers failed to reach a comprehensive budget deal soon. Any further downgrades would make Illinois the first state in the nation to lose its investment-grade status.

But, Rauner said, “the people should come first in Illinois—not Wall Street, not special interests, not the political class.”

Dramatic July 4 Session

The head-butting between Rauner and Madigan followed a dramatic Fourth of July session of the Senate that included passage of the three 2018 budget bills. In quick order, the Senate approved:

  • S.B. 6, a $36 billion appropriations bill for Fiscal Year 2018;
  • S.B. 9, a revenue bill raising $5 billion through a permanent income tax increase; and
  • S.B. 42, a budget implementation measure that authorizes borrowing to pay down the state’s unpaid bills.

Rauner, just as quickly, vetoed the three bills. However, the Senate voted to override on all three measures late in the day.

Tax Code Changes

The budget makes several substantive changes to the tax code, shoring up an annual revenue shortfall estimated at $6 billion.

Under S.B. 9, the corporate income tax rate would rise to 7 percent from 5.25 percent, generating approximately $500 million annually. The personal income tax rate would be raised to 4.95 percent from 3.75 percent, generating almost $4.5 billion annually. The tax hikes would commence retroactive to July 1, the first day of the fiscal year.

John Patterson, a spokesman for Senate President John Cullerton (D), said S.B. 9 would close off three corporate tax “loopholes,” raising $125 million per year. S.B. 9 would eliminate the domestic production deduction by decoupling from the federal regime. The noncombination rule, which prohibits unitary companies that use different apportionment formulas from filing a single return, would be eliminated. And the bill would eliminate the so-called “outer continental shelf” exemption.

Businesses, however, would benefit from the reinstatement of the research and development credit.

Netflix Tax Canned

Patterson said S.B. 9 is also noteworthy for tax code modifications missing from previous versions of the legislation. A sales tax expansion, a new “Netflix tax,” and an overhaul of the Illinois whistle-blower statute were all removed.

The Senate originally supported higher taxes on streaming television services, and various services including dry cleaning, tattoos, and body piercings.

Another version of S.B. 9 sought to solve a problem with the False Claims Act, specifying that the law doesn’t apply to any taxes imposed, collected, or administered by the state. Illinois law has been criticized for creating a virtual cottage industry of small-stakes whistle-blower lawsuits seeking damages for minor violations of the sales and use tax.

Low-Income Households

Patterson said S.B. 9 makes several substantive changes to Illinois’ revenue program to assist low-income households, students and teachers.

S.B. 9 boosts the earned income tax credit from 10 percent to 14 percent for 2017, and then to 18 percent in 2018. The bill raises the cap on the education expense credit to $750 per family from the current rate of $500. The measure also creates a new tax credit of $250 for teachers using personal funds to purchase classroom supplies.

Another change would impose means testing for Illinois’ education expense credit, the personal exemption and the property tax credit. Going forward, the three credits would only be available for single filers earning less than $250,000 per year and joint filers earning less than $500,000 per year.

In addition, S.B. 9 erases the sales tax discount for gas and extends the discount for majority-blended ethanols. The change would generate $100 million annually for the state.

Finally, S.B. 9 would establish the State Tax Lien Registration Act. The new law would permit the Department of Revenue to file notice of tax liens in the registry and eliminate filing requirements before county recorders. Patterson said the change would generate $40 million per year.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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