Tax Decoded | Winter 2018
Decoding the Democrats’ Sweep
What’s in store for Illinois tax policy after Democrats sweep November’s election?
Keith Staats, JD
Executive Director, Illinois Chamber Tax Institute
Deciphering Today's State & Federal Tax Law
I’m writing this column on Nov. 7, the day after Democrats swept Illinois’ election. By time
you read this, the state’s newly elected governor, Chicago Democrat J.B. Pritzker, and a
host of Democrat legislators will, hopefully, be deep in preparation for their debut in
Springfield. Let’s decode what a Democrat-controlled Illinois General Assembly might mean
for Illinois tax policy.
With an unpaid bill backlog of nearly $7.5 billion and an underfunded pension system,
our new state leaders will immediately face a set of significant fiscal challenges for the
current fiscal year and the years ahead.
While Pritzker never released a comprehensive tax plan during the campaign, piecing
together what he has said about taxes over the course of his campaign could be telling in
how he intends to approach his budgetary inheritance.
Unlike in prior years, the General Assembly and soon-to-be former Gov. Rauner passed a
budget for fiscal year 2019. However, whether the budget was truly balanced has been an
issue of debate. According to some reports, the budget as passed had a structural deficit of
approximately $1.2 billion, and the state’s budget picture has not improved since July 1.
In fact, the state has been ordered by courts to pay approximately $400 million in back
pay to state employees in response to a lawsuit filed against Rauner over his failure to pay
“step raises” (longevity raises) to union employees after expiration of the collective
bargaining agreement with the state’s largest employee union. No money was appropriated
for these raises in the current state budget. Worse even, the budget was “balanced” by
underfunding the cost of employee and retiree healthcare.
Recently, the Teachers’ Retirement System announced that the required payment to the
pension system will increase for fiscal year 2020 by about $400 million because of changes
to investment return calculations made by their actuaries.
Additionally, the education funding reform legislation enacted into law a couple of
years ago envisions the state increasing funding for local schools by a few hundred
million dollars each year.
Added to all this, Pritzker will also face pressures to make good on his campaign promises
for additional funding for existing and new state programs when crafting his first budget.
There are two obvious ways to address what appears to be a growing structural deficit and
pay for new and expanded programs — cut expenses or raise additional revenue (taxes).
Pritzker’s campaign promises included repealing the Invest in Kids tax credit/scholarship
program. He’ll need support from the General Assembly do so, and even then, the repeal
would save only about $75 million per year — a significant amount of money in absolute
terms but a small amount in the context of a $36 billion state general funds budget. And
while the state’s pension debt is a huge portion of state spending, the Supreme Court has
made clear that the state has few, if any, options available for cutting benefits to current
employees and retirees as a method of reducing existing pension obligations.
So, with limited options for cutting expenses, both for political and
legal reasons, well… we know what that means — the more likely
route for Pritzker is to increase existing taxes and reduce or
eliminate existing tax exemptions, credits, and deductions.
Raising tax rates is a difficult vote politically for most members of
the General Assembly, and it appears that Pritzker has ruled out an
immediate tax increase. Further, the issue with reducing or
eliminating existing tax exemptions, credits, and deductions is that
they don’t account for nearly enough revenue to even come close
to balancing the existing structural deficit unless exemptions,
credits, and deductions provided to individuals are reduced. Given
Pritzker’s campaign statements, that appears highly unlikely.
Pritzker strongly favors amending the Illinois Constitution to
authorize a graduated income tax. The challenge here is the earliest
that can happen is calendar year 2020, and even then, the
graduated tax wouldn’t be effective until calendar year 2021. Of
course, that’s assuming the General Assembly can pass a proposed
amendment by a three-fifths majority at least six months before the
November 2020 election at which the proposed amendment would
be presented to Illinois voters. For the proposed amendment to be
enacted, it must be approved by 60 percent of those voting on the
amendment or the majority of voters in the election.
Pritzker has proposed a “graduated-like” tax in the interim. As I
understand this idea, the flat tax rate would be increased in
combination with increases in deductions and credits provided to
individuals who are not “rich.” This implies the increased rate
would only result in higher taxes on the rich. However, Pritzker has
backed off this idea in interviews since winning the election.
Legalizing and taxing recreational marijuana is another potential
source of new state tax revenue — proponents suggest hundreds of
millions of dollars could be raised. However, legalization would
take time to pass and implement. For example, if legalization is
passed by the end of the 2019 spring session (May), time would be
needed to place the required regulatory and tax infrastructure in
place, license vendors, and more. So, we’re more realistically
looking at legalization in January 2020 and a realized revenue
impact in the following year.
Pritzker is also on record as favoring gambling expansion, including
legalized sports betting, as a means of generating additional
state tax revenue. Previous gambling expansion proposals have
included expanding the number of casinos, including a Chicago
casino, as well as allowing various sorts of gaming at horse racing
tracks. These proposals have met opposition from not only those
opposed to gambling but also existing casino owners who fear
cannibalization of their customer base, fights over who would
own a Chicago casino, and how the proceeds from a Chicago
casino would be distributed. Plenty of unanswered questions
surround sports betting as well. In other words, expanded gambling
won’t be a quick source of additional state revenues either.
As with legalization of recreational marijuana, I suspect the
state wouldn’t see increased revenues from gambling expansion
before January 2020.
What this boils down to is 2019 will be another challenging budget
year — any solution is painful to someone.