Gov. J.B. Pritzker long warned that without his graduated-rate income tax, which voters rejected in November, Illinois would be left with only two options to address its chronic budget problems: raising income taxes or double digit across-the-board spending cuts.
But ahead of his budget address to lawmakers Wednesday, Pritzker outlined a state spending plan that would neither raise the income tax or alter the total budget outlay.
He did call for closing $900 million in unspecified “corporate tax loopholes,” which opponents are already labeling a tax hike on businesses in the middle of the coronavirus pandemic.
What remains to be seen is whether the governor will look to other avenues to increase revenue, although his options appear limited. He has opposed two of the leading options favored by some budget watchers: instituting a tax on retirement income and applying the sales tax to some services.
Pushing for those changes or an income tax hike is always politically difficult, and would be even more so during the COVID-19 era, said David Merriman, an expert on state finances at the University of Illinois at Chicago.
“It doesn’t leave him, really, many places to go — or any places to go,” Merriman said.
Details were sparse in the budget overview Pritzker presented last week. His plan for the budget year that begins July 1 calls for leaving the flat-rate income tax at 4.95% and holding spending from the state’s general fund flat, despite his persistent warnings of “painful cuts.”
The governor’s budget proposal is only the starting point for discussion, even with his fellow Democrats holding supermajorities in both chambers of the legislature. The budget process this year also will be a test for new House Speaker Emanuel “Chris” Welch and Senate President Don Harmon, who is in his second year.
While the state has escaped some of the most dire fiscal predictions of the pandemic, the health crisis has added to a mountainous pile of debt.
Illinois has a nearly $4.9 billion backlog of unpaid bills and $141 billion in unfunded pension liabilities, plus another $4.3 billion in short-term debt. That includes $2.8 billion still outstanding from the $3.2 billion Illinois borrowed from a special Federal Reserve program to help shore up its past two budgets during the pandemic, money that must be paid back within three years.
The Pritzker administration has said better-than-expected tax revenue has cut an anticipated deficit for the coming budget year to $3 billion from $5.5 billion, a hole the governor’s office says its proposal would close.
The administration also has said it continues to hold out hope for more federal aid from Washington now that President Joe Biden is in the White House and Democrats control both houses of Congress. A recent proposal on Capitol Hill would send Illinois $7.5 billion in direct federal aid, but that prospect remains far from certain with Democrats relying on Vice President Kamala Harris to break potential tie votes in the U.S. Senate.
Pritzker told reporters Wednesday that his plan for next year’s budget does not rely on federal assistance to balance, unlike the $43 billion spending plan he signed into law for the budget year that ends June 30. The governor’s full plan for plugging a nearly $4 billion hole in the current budget also remains unclear.
The plan he will present next week “is reflective of what I’ve been saying for some time now, which is that we’re going to have to make some painful cuts in state government in order to balance the budget,” Pritzker said.
“It’s also reflective of the fact that the economy in Illinois has actually done better than people have expected, and businesses are up and running,” he said. “We’ve lost fewer jobs anyway than people expected, and the result of all that is more revenue to the states. The combination of the cuts that we proposed, the fact that we have a flat budget to last year and the fact that the economy has done better is what’s allowing us to balance the budget.”
The governor in December announced $700 million in cuts he said he could make unilaterally through steps such as freezing hiring and suspending grants. Opponents have noted that some of the governor’s measures require concessions to which state employee unions have not agreed, while others are outside the general fund that covers most day-to-day state operations.
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“The $700 million cut list was not transparent at all,” said state Sen. Chapin Rose of Mahomet, a lead Republican budget negotiator.
Republicans will be looking for more transparency and a greater level of detail when Pritzker presents his full plan, Rose said.
“You can’t just say something like, ‘X amount of cuts to loopholes’ without putting forth what loophole and how much,” he said.
Since voters overwhelmingly rejected an amendment to the state constitution to allow for an income tax levied at different rates for different levels of income, Pritzker has called for Republicans, who uniformly opposed the measure and campaigned heavily against it to propose cuts of their own to balance the budget.
GOP lawmakers haven’t complied, instead calling on Pritzker to release the proposed budget cuts he asked state agency leaders to prepare this past fall. Those proposals have never been made public, and the governor’s office denied an open records request from the Tribune last year for documents detailing the proposals.
Senate Republican leader Dan McConchie of Hawthorn Woods, who like Welch will be leading his caucus through budget negotiations for the first time this spring, said he appreciates that Pritzker appears to be listening to the message voters sent in rejecting his tax proposal.
“They want the state to live within their means with the money that’s currently being sent to Springfield, just like every other household is having to operate, especially now during the pandemic,” McConchie said.
But Republicans will be closely watching what exactly Pritzker means when he talks about closing “corporate tax loopholes,” he said.
“Unfortunately, ‘loopholes’ is sometimes a derogatory term used for actually what’s very legitimate tax credits that are designed to help boost economic growth,” McConchie said.
Pritzker has drawn criticism from House Republicans for his decision last month to unilaterally freeze a new tax credit for construction jobs that was part of a bipartisan budget deal in 2019.
If Pritzker were to endorse the across-the-board spending cuts his agency heads prepared, it could be politically expedient, but it would not be practical in reality, said Merriman, the UIC state finance expert.
“There’s very little you can do on the spending side,” he said. “If you go piece by piece through the budget, it’s really hard to see how you can make cuts without really hurting vulnerable people.”
The solutions on the revenue side, however, come with very high political hurdles, Merriman said.
Aside from taxing retirement income or services, common practices in other states, another option would be raising the state income tax rate and increasing the earned income credit or personal deduction to soften the blow on low-income taxpayers, Merriman said, even as he acknowledged that the idea is “just incredibly politically unpopular.”
It’s also unlikely Welch or Harmon would want to be the ones pushing for a tax increase this early in their tenures leading the House and Senate.
“We have to, right now, keep all options open,” Welch said. “We’ve got to find ways to reinforce the critical services while also restoring our fiscal house.”
As for whether “all options” includes a tax on retirement income or other tax increases, Welch said he is “willing to listen to what the governor’s ideas are and go from there.”
Eric Kim, an analyst who covers Illinois for Fitch Ratings, said the ratings agency has long made note of the failures of the state’s leaders, including longtime former House Speaker Michael Madigan, to make the difficult decisions needed to stabilize state finances. The agency is looking to see how the situation will take shape under new leadership.
Under Pritzker, the state was making small progress before COVID-19 struck, Kim said.
“It’s a question of whether the state can get back to that trajectory,” he said.
Fitch downgraded Illinois to one notch above junk bond status in April amid early concerns about the effect the pandemic would have on the state’s economy. Thanks to federal stimulus and other factors, Illinois and other states have not suffered nearly as much as analysts feared, Kim said.
The agency currently has a negative outlook on Illinois’ finances, “but it’s not inevitable that the state gets downgraded,” Kim said. “That’s why we haven’t done it yet in terms of bringing the state below investment grade. We think there are options that remain. … There are things the state can do to insulate itself from the challenges.”
A previous version of this story did not reflect the portion of a Federal Reserve loan that the state has repaid.
Chicago Tribune’s Jenny Whidden contributed.
dpetrella@chicagotribune.com
