Fresh off spending $58 million of his fortune in a losing effort to pass a graduated-rate income tax, a frustrated Democratic Gov. J.B. Pritzker on Wednesday said “painful” budget cuts are coming and suggested an attempt to raise taxes could come as soon as two weeks.
Pritzker lashed out at Republicans, business groups and Ken Griffin, Illinois’ richest man, accusing opponents of distorting the truth about what the amendment would have done.
“There will be cuts, and they will be painful,” Pritzker said Wednesday at his daily coronavirus briefing. “And the worst thing is, the same billionaires who lied to you about the ‘fair tax’ are more than happy to hurt our public schools, shake the foundations of our cities, and diminish our state. Maybe because they think it won’t hurt them.”
Now Pritzker, the billionaire Hyatt Hotels heir who made a graduated income tax the centerpiece of his campaign for governor, and lawmakers are left with a limited menu of politically perilous options to stabilize the state’s chronically precarious finances. Their main choices: raise taxes on everyone, regardless of income; make significant cuts to spending on programs like education and social services; or both.
Pritzker was clear from the start that he believed the only choices if the measure failed would be a 15% across-the-board cut to discretionary spending, a 1 percentage point increase in the state’s flat-rate income tax rate of 4.95%, or some combination.
While not directly calling for an increase to the flat income tax rate, Pritzker said he would try to minimize the effect of budget cuts on working families.
“But there is a point at which, there’s no doubt, that without revenue, some of those cuts will start to hit things that do affect working families,” Pritzker said. “And I don’t know that anyone wants that. Do we really want to cut education funding in the state? I don’t think so.”
Asked whether lawmakers should take up these issues before the new General Assembly is seated in January, Pritzker said, “We have to move expeditiously, there’s no doubt.”
The governor maintained that Republicans and their supporters will bear much of the responsibility for the difficult choices ahead.
“Whatever happens here, the pain that is endured by the people of Illinois, by the working families of Illinois, is on the Republicans and the special interests and the billionaires that back the Republicans,” Pritzker said. “They’ve got to step forward and help.”
Even before the COVID-19 pandemic blew a hole in the state budget, Illinois struggled for decades to align its revenues and expenses, often passing spending plans that relied on gimmicks to appear balanced on paper.
The state went nearly two years without a budget as then-Republican Gov. Bruce Rauner clashed with the Democratic-controlled General Assembly. The results of those years of fiscal mismanagement and political impasse: more than $8 billion in unpaid bills, $137 billion in unfunded pension liabilities, and a current budget of $43 billion budget that relies on borrowing from the Federal Reserve and federal coronavirus relief that may never materialize.
In September, the governor’s budget office projected the state would lose a combined $6.5 billion in revenue this year and next year, and Pritzker asked agency heads to propose cuts of 5% this year and 10% next year.
Republicans in Springfield were unified in opposition to the graduated-rate income tax, which makes it highly unlikely any would support a flat tax increase. And while the minority party frequently calls for cutting spending to bring the budget into balance, they haven’t presented a detailed plan for accomplishing that, even when Rauner held the governor’s office.
One popular Republican proposal is to cut pension benefits for state workers, a move that likely also would require a change to the state constitution. After the Illinois Supreme Court struck down previous attempts, the issue has become a nonstarter for Democrats.
Other long-discussed options that have never gained traction in the legislature include expanding the sales tax to apply to more services.
It remains to be seen whether Democrats would be willing to pass a tax increase on their own or if they can reach an agreement with Republicans on a package of cuts. Traditionally, House Speaker Michael Madigan has been averse to passing any kind of tax increase without some GOP support.
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While many General Assembly races were still too close to call on Wednesday with scores of mail-in ballots uncounted, it appeared the balance of power would remain largely unchanged. According to unofficial results compiled by The Associated Press, Democrats were poised to maintain or possibly add to their 40-19 majority in the Senate while potentially seeing a net loss of two seats in the House. Those results would preserve the party’s supermajority.
“At the end of the day, middle-class and working-class families in Illinois are going to pay,” said state Sen. Andy Manar, a Democrat from Downstate Bunker Hill and a lead budget negotiator. “They’re either going to pay more in taxes, which I think is a very, very difficult sell in front of the General Assembly, or they’re going to pay by cuts in schools, cuts in health care, cuts in social services at a moment in time when those families can least afford to take on those things.
“So, who doesn’t pay in this scenario? The wealthy. The wealthy win again.”
If the legislature were to approve cuts to education spending, for example, that would likely result in property tax increases to make up the difference for school districts at the local level, Manar said.
“We have serious, serious budget challenges, and the best option was taken off the table,” he said.
The legislature is scheduled to meet for six days over two weeks in late November and early December for its fall veto session, but the current COVID-19 surge across the state has cast some doubt on that calendar.
House Majority Leader Greg Harris, a Chicago Democrat, said it’s too soon to say whether lawmakers will take up budget-related issues before the new General Assembly takes office in January.
“There will be … a full review of every option that’s available,” Harris said.
In addition to raising the income tax or cutting spending, he said, “there are a lot of corporate tax loopholes that I think we should look carefully at that potentially we cannot afford any longer.”
With the outcome of the presidential election and the balance of power in the U.S. Senate also still up in the air, significant questions remain about whether Washington will be able to reach an agreement on sending aid to struggling state and local governments.
House Republican leader Jim Durkin of Western Springs called passing a state budget in hopes of getting “bailed out by the federal government … irresponsible and the wrong thing to do.”
Durkin said the outcome of the graduated income tax vote translated to voters saying “the finances of the state are a mess and the Democrats are not up to the challenge of fixing it.”
“The governor needs to go back to what he did earlier in the year, where he stated that we need to have 6.5% cuts in the agencies’ spending across the board,” Durkin said. “There’s a little bit more than $1 billion, we could start there. Cuts are not easy to do, but when you spend and continue to spend above and beyond the revenue that we bring in, this is what’s going to happen.”
The Pritzker administration estimated the rates that would have gone into effect Jan. 1 if voters approved the graduated tax would have generated $1.2 billion in the budget year that ends June 30 and $3.4 billion in future years.
Professor David Merriman, an expert on state finances at the University of Illinois at Chicago, said if the state were to ultimately implement a 20% across-the-board income tax increase, as Lt. Gov. Juliana Stratton warned in September would be needed if voters didn’t approve the graduated-rate income tax, it would bring in more revenue for the state, at least over the short term, than Pritzker’s graduated-rate tax plan.
The state could again borrow from the Federal Reserve in order to get through the budget year “without making draconian cuts, or cuts where the implications are bad for the economy,” Merriman said.
To reduce enough nonpension and nondebt spending to close the budget gap, the state would need to “impose across-the-board reductions of almost 11%,” credit ratings agency Moody’s Investors Service concluded in a note issued Wednesday about the graduated income tax vote’s failure.
“This degree of austerity would have significant implications for the delivery of core education, health care, corrections and other services,” Moody’s said.
The amendment’s failure will also make a reliance on deficit financing more likely, Moody’s said.
But Moody’s concluded that raising the flat-rate income tax from 4.95% to 5.65% would generate roughly $3 billion in additional revenue, roughly the same amount of revenue the graduated-rate income tax was projected to bring in during its first full year.
If the General Assembly were to raise the flat income tax or take action to open other revenue streams during the fall veto session, it could “preclude the need for the $1.27 billion of deficit bonds,” Moody’s said.
Raising the flat-rate income tax could be done in combination with other changes to the state’s revenue system, such as increasing the personal deduction and expanding the sales tax base to cover services, Merriman said.
“There are other things that could be done to work within the flat-rate tax to make it more progressive, but whether any of it is politically feasible, I don’t know,” Merriman said. “I mean, legislators have just seen how taxpayers feel about the graduated rate amendment. It may be very hard to convince them to vote for a tax increase.”
dpetrella@chicagotribune.com
jmunks@chicagotribune.com
