Several factors at play in tax vote

By Jamey Dunn

The House plans to vote for spending before it takes up the issue of revenue, but a vote on extending the current income tax rate is just part of the budget picture.

House Speaker Michael Madigan said today that he hopes to first pass the spending portion of the budget, which would presume an extension of the temporary income tax. He said that the move is needed to help lobby lawmakers to approve tax rates needed to fund the budget. “Our purposes in advancing the budget first is to set the bar against which we will work to convince people to vote for the revenue.” House committees approved budget bills today that are based largely on Gov. Pat Quinn’s recommended budget.

Republicans say that the move “puts the cart before the horse.” Elmhurst Republican Rep. Dennis Reboletti said that businesses and families do not make their budgets by first deciding what they would like to buy and then figuring out how to pay for it. “We know what our income is. We make decisions based off of that. We don’t assume that we can buy a new house because we hope to have more money, but not have the additional revenue to pay for it.” Many Republicans argued today that a vote on a budget that spends more than the state expects to take in under current law would be unconstitutional. “It is on its face blatantly unconstitutional,” said Catlin Republican Rep. Chad Hays. “Who on planet earth budgets in this fashion? This is simply not done anywhere by anybody.”

 But Chicago Democratic Rep. Greg Harris, who is chairman of the House human services budgeting committee, said that moving spending bills along is all part of the process and that the order in which it happens is not as important as getting the whole job done. “There are a lot of pieces of the budget which we have to pass,” said Harris. “I think we have until midnight on the 31st of May to reconcile all of this.” He said that if lawmakers can determine what services they think the state should deliver, then when it comes time to make revenue decisions, they can avoid asking for more than is needed. Harris was clear that he does not think that the state can get by on the current revenue projections that allow the income tax to begin stepping down in the second half of Fiscal Year 2015. Harris called the step down “a terrible financial cliff that we would drive the families of Illinois right off of.”

Republicans argue that Democrats are making the budget scenario under the current rates look muckh worse than it would need to be. “We on our side of the aisle feel very strongly that we can craft a workable budget without devastating extreme irresponsible cuts or reductions. We can craft a responsible budget without having the continuation of the tax,” Rep. David Harris, a Republican from Arlington Heights.

The House is expected to start taking votes on spending bills tomorrow. As Democratic leadership in the chamber works to get the support to stop the income tax rates from stepping down, other issues will likely come into play.

Rep. David Harris said that he expects that a comprehensive business tax reform package will emerge before the end of the month. Harris serves on a House committee that has held hearings over the last year on the business tax climate in the state. (House Speaker Michael Madigan presented a bill with changed to the EDGE tax credit to that committee today. See this blog post for the details.) Madigan said to the committee this morning that he would be willing to allow the corporate income tax rates to roll back if the proposal was tied to other changes. “I’m prepared to advance that bill, but as part of a balanced package,” Madigan told the committee.

Business friendly tax breaks tied to an extension of the income tax rates, or possibly just the individual income tax rate, would serve several political purposes. They could provide cover for Democrats who vote for a tax increase as part of an overall “tax reform” package. They could possibly be used to lure Republican votes on the income tax extension. More likely, Republican “no” votes on business friendly concepts could be used for negative campaign advertising and mailers before the November general election.

But Rep. David Harris says that he believes that the business tax plan will be separate from an income tax vote. He says that he thinks that the package would address such issues, as the franchise tax, incorporation fees and tax credits for manufacturers when the buy equipment. “I think it will be separate from the tax rate bill,” he said. Harris said that if it is tied to extending income tax rates, he does not think any Republicans would vote for it. “I think if it’s a business related package, they’re going to want some Republicans on the package,” Harris says. “I don’t consider an extension of the income tax [to be] tax reform.” He said that any business tax tweaks would likely be revenue neutral. So if some tax cuts are made larger or some taxes eliminated, other tax breaks may be scrapped or reduced. Some would call it closing tax loopholes. Harris, however, would not call it that. “Let’s not call them loopholes. Let’s call them, perhaps, exemptions or credits that we now give that may no longer be beneficial or helpful, or they don’t achieve the public policy that we initially intended them to achieve.”

Mark Denzler, vice president and chief operating officer of the Illinois Manufacturers’ Association, said that he thinks that the work on a business tax package is a mix of policy and politics. “I think it’s a combination of both. I think there’s some legitimate changes being made.” Denzler said that he has not seen a plan yet. “We’ll just see how things play out. We’ll have to look at a final package. ... I think that there can be some positives for the business community.” But he said that coupling an extension of the tax rates with some tax sweeteners for businesses would fall short of being a game-changing move when it comes to the state’s fiscal policy. “Ultimately, we think we need comprehensive tax reform. Making the income tax increase permanent and adding a few tax incentives is a little bit more of a Band-Aid quite frankly to the whole problem that Illinois faces.”

A few more tax issues could also end up in the mix. In his budget address, Quinn called for property tax relief and an incremental doubling of the Earned Income Tax Credit. Both of these options could be used to soften the blow of a tax rate extension and potentially pull some reluctant votes on to it. Under Quinn’s plan, homeowners would lose their current property tax credit and it would be replaced with a flat $500 refund for each owner occupied property. Quinn’s budget office estimates that such tax relief would cost $1.3 billion annually. The current credit costs about $600 million. While some homeowners currently get a tax credit that is larger than $500, Quinn’s staff said that 92 percent homeowners would be better off under his proposal. Quinn’s plan would also increase the EITC from 10 percent of the federal credit to 20 percent at a rate of 2.5 percentage points per year. The increase would cost more than $200 million annually once it reaches 20 percent. At the time of the address, Quinn and his staff were aggressively packaging his pitch to make the tax increase permanent as a reform of the state’s tax system. His proposal also included a five-year budget “blueprint” that calls for spending caps, a rainy day fund and cutting the state’s bill payment cycle down to 30 days.

When all else fails, pork spending—I mean, local construction projects—may also be an option to get votes on a tax rate extension. Democrats acknowledged today that they are also working on a capital construction bill. Quinn has been calling for a capital bill because the current plan, which was the first in 10 years, is about to run out. While Statehouse observers are always (justifiably) skeptical of the way that capital projects appear to be leveraged for votes, nobody can deny that work on Illinois roads and bridges is necessary and that many state facilities are in dire need of maintenance. What the funding stream for a capital bill would be is unclear at this point. Republicans warned today that it could come with more taxation. “There may be additional taxes out there to accommodate some of our other unmet needs,” said Hinckley Republican Rep. Robert Pritchard.

 Madigan told reporters this morning that he is working the roll call for an extension of the tax rates. He said that he is not trying to strong-arm lawmakers. “We’re not in the business of issuing threats. ...We don’t engage in tactics like that. We try to work with people, persuade people, cajole people,” Madigan said. “We talk in terms of their view of where the sate should be, what the state should be doing for its citizens.” Madigan said.

When asked how many voted he still needed, he said that he was not to the point of knowing exactly how many members he still needs to persuade. While Senate President John Cullerton has predicted that session could adjourn early this year, Madigan indicated today that might not be the case. “There’s two and a half weeks left in the session. And we’ll be here. We’ll be on our job,” he said.