Battle looms over tax proposal, relief money
Democratic Gov. J.B. Pritzker got to deliver a rare bit of good financial news last week when he announced the state will bring in a few billion dollars more than expected, courtesy of a rebounding economy and federal largesse.
That allowed Pritzker to quell a bipartisan outcry of his previous plan to keep school funding flat. But it fell far short of solving a number of issues that remain as the governor and legislators look for ways to cover a projected $1.3 billion shortfall in next year’s budget of roughly $42 billion.
Lawmakers from both parties maintain their dim view of parts of Pritzker’s proposal to raise revenue by closing what he describes as corporate loopholes, but what business groups say represent tax hikes that will further beat down pandemic-battered businesses.
And the promise of $8.1 billion in federal coronavirus relief money, while solving some problems, appears to have a major string attached that might not allow the state to use the windfall to cover pandemic-induced borrowing.
All those factors are swirling as Pritzker and lawmakers begin to engage in earnest on the biggest annual rite in Springfield: agreeing on a spending plan before the new budget year starts July 1 — and preferably before the General Assembly is scheduled to adjourn at the end of May.
“The choices are really clear: We’re either going to have to find ways to cut to fill that hole, or we’re going to have to review the proposals the governor made to close corporate tax loopholes on wealthy individuals and corporations,” said House Majority Leader Greg Harris of Chicago, a lead Democratic budget negotiator. “Some mix of those will be required.”
Pritzker finds himself in this spot after voters last fall overwhelmingly rejected his graduated-rate income tax proposal, which would have brought in an estimated $3.6 billion a year to help stabilize the state’s chronically shaky finances.
A key point of the budget debate will be what to do with the federal relief money, with the state now in line for $600 million more than originally expected. Pritzker and legislative leaders in both parties have long said the money should first go toward paying down the state’s debts, most notably the remaining balance on $3.2 billion in Federal Reserve loans taken out to patch budget holes caused by the pandemic.
But preliminary federal guidelines on how the money can be spent contained an unwelcome surprise for cash-strapped Illinois: The Treasury Department says states can’t use the money to pay off borrowing.
Illinois was the only state that tapped the Fed program, and state officials are lobbying Washington for permission to repay the central bank with the influx of federal funds. Whether an answer will come before May 31 remains to be seen, but in the meantime Pritzker and lawmakers also are working to hash out how to use the rest of the money.
“We have to be very thoughtful over how we spend it over a period of time,” Harris said. “We know it’s largely one-time money, so I think we’re all going to want to look at it really carefully to be sure that we’re not building this into a base that then there would be a cliff when this money expired.”
Unfortunately for Illinois, other uses for the federal cash that could prove most helpful to the state’s longterm financial health — such as using it to pay down $141 billion in unfunded pension liabilities or depositing it in the minuscule rainy day fund — also are prohibited.
Despite those restrictions, the aid from President Joe Biden’s American Rescue Plan, which also includes billions of dollars for local governments, public schools and mass transit systems, offers the state time to come up with a better long-term plan for its finances as it emerges from the pandemic, said Laurence Msall, president of nonpartisan budget watchdog The Civic Federation.
“The state’s in a very bad financial situation. It was before the pandemic, and this revenue support has the potential to help the state of Illinois get through the next year,” Msall said. “But it is not going to solve the pension (problem), the high debt and Illinois’ sort of worst-in-the-nation credit rating unless the money is used wisely and more is done.”
That said, Msall gave Pritzker’s budget plan generally high marks for largely holding the line on spending and not relying on the budgetary gimmicks previously employed to cobble together so-called balanced budgets.
But he sides with many legislators in saying Pritzker should abandon his proposed tax changes — the “corporate loopholes” — in the midst of recession, especially with revenues up due to a stronger-than-expected economy and federal aid available to help cover some pandemic-related expenses.
So far, the Pritzker administration isn’t backing down, at least not publicly, despite the brightened financial picture.
The governor’s budget office on Thursday released new estimates showing the state is on track to bring in nearly $1.5 billion more than expected in the current budget year — thanks in part to economic activity generated by federal stimulus payments to individuals and enhanced unemployment benefits — and another $842 million in the budget year that begins July 1.
The bump gave Pritzker leeway to revise his plan to hold funding for elementary and secondary education flat for the second straight year. Instead, he’s now calling for a $350 million increase, meeting a target established in the bipartisan school funding overhaul signed into law by his predecessor, Republican Bruce Rauner.
But in announcing the rosier revenue numbers, the Pritzker administration doubled down on its “proposal to end $1 billion in corporate welfare.”
The budget plan Pritzker laid out in February called for raising $932 million in new revenue by making a series of changes to business tax policies, some of which took effect automatically in Illinois as a result of President Donald Trump’s 2017 tax cuts.
The largest share of the additional revenue — $314 million — would be generated by putting a $100,000-per-year limit on the amount of operating losses businesses can deduct. Another $214 million would come from rolling back a provision that allows business to write off the full cost of eligible equipment in a single year rather than in smaller increments over time.
While Republicans are no fans of any of the ideas on the governor’s list, what particularly draws their ire are proposals that renege on agreements Pritzker made to secure GOP votes for his budget and infrastructure plan during his first year in office.
Those proposals include Pritzker’s call for preserving the corporate franchise tax, eliminating an additional credit for companies receiving other state incentives if they create construction jobs, and lowering the credit for taxpayers who donate to private school scholarship funds.
“We put tough votes on for him,” House GOP leader Jim Durkin of Western Springs said. “We made him look good two years ago.”
Durkin said the proposals are “more about spite” over opposition from Republicans and business organizations that helped tank the governor’s graduated rate income tax proposal.
The additional revenue wouldn’t have been needed if Pritzker and the legislature’s Democratic majority had cut spending for the current year rather than relying on borrowing and the hope they could use federal aid to pay it off, Durkin said.
Republicans also are frustrated about not being any more involved in budget negotiations under new House Speaker Emanuel “Chris” Welch of Hillside than they were under his longtime predecessor, Michael Madigan, Durkin said.
“What was supposed to be a new day in Springfield is just a continuation of what I’ve dealt with over the years,” he said.
While Republicans have been much more vocal in their opposition to Pritzker’s proposed tax changes, some of his ideas, such as allowing the franchise tax to remain in place and limiting a discount for retailers who collect state sales taxes, are expected to be just as tough a sell to fellow Democrats — especially as small businesses have struggled as a result of Pritzker’s COVID19 restrictions.
Time is now short to come up with a plan to close the $1.3 billion gap in next year’s budget, but state Sen. Elgie Sims of Chicago, the Senate Democrats’ top negotiator, said he thinks budget talks need to go beyond the immediate crisis and focus on charting a better course for years to come.
He said he’s “cautiously optimistic” the state will get the green light to repay some of its debts with the federal relief money, but he also noted that the money can be used to cover expenses through the end of 2024.
Lawmakers need to evaluate whether any of Pritzker’s proposals would provide stable revenue to help address some of the state’s long-term budget problems.
“If we’re going to turn our fiscal ship around and make sure that we’re putting ourselves on a path to fiscal stability, it’s going to be important that we recognize that even with the rosier revenue projections, there’s still significant challenges and significant decisions that need to be made to cover those gaps,” he said.