Ill. tax talks far from over despite tax breaks passing

[December 14, 2011]  SPRINGFIELD -- Illinois lawmakers' decision to push through controversial tax breaks comes at a time when the state faces tough decisions in the upcoming session over taxation.

This week's agreement is going to take $350 million from state coffers annually through tax incentives for businesses and households as Illinois is struggling to chip away at a $15 billion deficit.

The tax relief has "reduced revenue to the state, ... which makes the problem we have down the road even worse," said Kent Redfield, a political professor at the University of Illinois at Springfield.

During the past decade, Illinois regularly spent more than it generated in revenue. Lawmakers and Gov. Pat Quinn slowly have been rolling back that practice.

Part of the effort was the temporary income tax hikes of 67 percent for individuals and 47 percent for businesses, passed in January. Those increases are expected to generate $7 billion annually until they expire at the end of 2014.

However, this revenue runs up against other financial pressures facing the state. Illinois' payment to its five pension funds is going up next year by $1 billion, from $4.9 billion to $5.9 billion. Medicaid costs are projected to increase as well.

Despite these perils, the state's finances can move from sickly to healthy by the time the income tax expires at the end of 2014, Redfield said.

"If we make major cuts and trim our spending and devote all of the tax increase to paying bills, we can just about get back to even," Redfield said.

The temporary tax increase was approved with only Democratic votes. The political dynamic in the Statehouse could be different in 2014. Lawmakers who voted in 2010 to raise the income tax might not support more taxes, Redfield said.

Lawmakers say they're not oblivious to the fiscal challenges ahead.

"We had a long, free ride where we were doing things we shouldn't have done from a spending standpoint and enhancing benefits standpoint -- the list goes on and on. Those days are over," said Illinois House Minority Leader Rep. Tom Cross, R-Oswego.

State Rep. John Bradley, D-Marion, who helped negotiate the tax breaks this week, said lawmakers are evaluating the state's tax code.

"We're going to have a lot of issues to deal with at that point," said Bradley, who is chairman of the Illinois House Revenue and Finance Committee.

State Sen. Kirk Dillard, R-Hinsdale, agreed. "This state needs comprehensive tax reform. Our tax code needs to be updated. It needs to have something done to it," Dillard said.

Neither he nor Bradley would offer any specifics as to what those changes might be.

State Sen. Kwame Raoul, D-Chicago, suggested Tuesday the state look at making its income tax progressive -- the more a person makes, the more he pays. Doing that would require a constitutional amendment since income tax is prescribed in the state's constitution.

This isn't the first time Illinois has had a temporary tax increase.

Former Republican Gov. Jim Thompson signed a temporary increase in the late 1980s. That increase became permanent under former Republican Gov. Jim Edgar in the early 1990s. The 3 percent tax rate held until January, when it jumped to 5 percent.

The situations surrounding the state's finances in the early 1990s and the most recent income tax increase are different. In the 1990s, the state had a $2 billion deficit. Before the most recent income tax increase, the state was facing a $15 billion deficit.

[Illinois Statehouse News; By ANDREW THOMASON]