SPRINGFIELD – An influential government watchdog group says Illinois should keep its temporary income tax increase in place for a year longer than initially promised and begin taxing retirement income to dig the state out of a massive budget hole – a solution that’s both being praised for its even-handed approach and digested with a strong dose of skepticism over its prospects in an election year.
The Chicago-based Civic Federation says its five-year plan would allow the state to pay off its $5.4 billion backlog of unpaid bills and avoid budget cuts precipitated by a drop in revenue.
The 47-page report, released Monday – two weeks before the March primary and three weeks before Democratic Gov. Pat Quinn’s scheduled budget address – is a far more detailed plan than has emerged so far from legislative leaders and gubernatorial candidates as the state’s budgeting process has gotten underway in recent weeks.
“This is exactly the sort of cure Illinois has to take,” David Yepsen, director of Southern Illinois University’s Paul Simon Public Policy Institute, said. “It’s a little pain for everyone but will get us out of our problems in a few years.”
However, he added, “this is the sort of thing we can expect to see get debated after the elections in the lame-duck session late this year.”
Individual income tax rates in Illinois are scheduled to roll back from the current 5 percent to 3.75 percent next January, with corporate rates dropping from 7 percent to 5.25 percent.
The expiration will cause the state to lose more than $1.7 billion in tax revenues next year and more than $4 billion in fiscal year 2016, the Civic Federation predicts.
The federation says the state should “eliminate the pending revenue cliff” by keeping current tax rates in place for one more year, before allowing them to drop gradually. By fiscal year 2019, the individual income tax rate would be 4 percent, and the corporate rate would by 5.6 percent.
At the same time, the proposal suggests that the state broaden the income tax base to include taxing retirement income for the first time.
Illinois, the report notes, is just one of three states across the country that exempts pension income from income tax. It is one of 27 states that doesn’t tax Social Security income.
Civic Federation President Laurence Msall said the plan, combined with the recent pension reform proposal passed by the Legislature, “would finally allow the state to move beyond what has become a perpetual fiscal crisis.”
“Revenue enhancements alone are not enough to provide long-term sustainability for the state’s finances while overreliance on expenditure reductions could cripple essential services,” he said.
Quinn and a number of lawmakers on both sides of the aisle pledged to take the group’s suggestions under consideration from the federation— one of the strongest forces in raising awareness about the state’s growing pension crisis in recent years.
Still, Republicans and Democrats remain at odds over a fix, with disagreements likely to only intensify as the November general election nears. On top of that, the prospect of angering public sector unions and retirees — crucial blocs of voters already angered over recent pension reform — is seen as a political live wire in an election year.
Many Republicans — including three out of the four GOP primary bidders — support allowing the increase to expire as scheduled. House Republican Leader Jim Durkin on Monday said while the report had a number of useful recommendations, he disagreed with the suggestion that the state had a “revenue problem.”
Quinn has so far stayed mum on the budget plan he’ll call for later this month.
State Sen. Daniel Biss, a mathematician and leader in recent pension reform negotiations, called it “really politically hard” for lawmakers to agree on a solution in the upcoming months.
Still, the Evanston Democrat said he has hopes that the federation report will move discussions about tax reform in Illinois forward.
“With the rate dropping so much in 10 months, this should be an opportunity to have a rational conversation about what tax policy we want, instead of a political food fight,” Biss said.
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