March 27 (Bloomberg) -- Illinois Governor Pat Quinn proposed keeping an income-tax increase that expires at year end, to avoid making cuts in education.
Quinn made the recommendation yesterday as part of his fiscal 2015 budget, ending months of speculation about his plans for the 2 percentage-point increase approved in 2011 and that would, if allowed to expire, leave a $2 billion shortage.
“We cannot stand by and allow savage cuts to our education and to these critical services to unravel the progress that we have made,” Quinn said in a speech to a joint session of the General Assembly.
The proposal sets up an election-year fight over tax policy in the state with the nation’s lowest credit grade. It’s saddled with a $100 billion pension shortfall and almost $5 billion in unpaid bills. No Republicans voted for the levy in 2011, and their party’s governor nominee, private-equity executive Bruce Rauner, has said it should end, although he hasn’t detailed where cuts would be made.
Even as states emerge from the recession in stronger economic condition and some project surpluses for the coming year, Illinois, the nation’s fifth-most-populous state, is digging out of a hole created by years of pension underfunding. The state was ahead of only five others in tax revenue growth in the 12 months through June, according to the Bloomberg Economic Evaluation of States.
Rauner called Quinn’s proposal another broken promise.
“We can balance the budget without more tax increases, if we create a growth economy, and restructure and reform our broken government,” Rauner said in a statement released by his Chicago campaign office.
The 2011 measure mandated that part of the increase would remain. The personal income-tax rate of 5 percent is to drop to 3.75 percent at the end of the year.
“We cannot cut our way to prosperity,” Quinn said, following up with an unnamed reference to Rauner. “The truth is, those who are telling you that Illinois can tax less and spend less and still expect to fund education are simply not telling you the truth.”
Debt sold by the state and its municipal issuers reflects the situation. It has returned 3.54 percent so far this year, according to S&P Dow Jones Indices. That compares with only 3.17 percent for the broader municipal market as investors prefer riskier debt to make greater gains.
While Quinn, 65, said he would include property-tax relief for homeowners in the budget that begins July 1, it faces uncertain prospects as all legislators are up for re-election in November. There are also competing proposals, including one from Democratic House Speaker Michael Madigan that would impose a higher levy on those earning more than $1 million.
The Civic Federation, a Chicago-based nonprofit that studies government finance, has called for extending the 5 percent personal income tax one more year and broadening the base by taxing retirement income. Quinn said he opposes increasing the burden on senior citizens.
Senate President John Cullerton, a Chicago Democrat, said he supports making the current tax rate permanent.
“We have to maintain the same level of revenue,” Cullerton said in a statement from his office.
Treasurer Dan Rutherford, a Republican, said he opposes an extension of the income tax rate, “but it needs to be part of the discussion and not the only solution.”
When lawmakers faced a financial crisis in the 2010 election year, they waited until after Quinn’s election to raise taxes. Democrats hold veto-proof majorities in both chambers.
Illinois has the nation’s most underfunded pension system. It was the most populous of five states, including Kentucky, North Dakota, Oregon and Vermont, where pension-funding ratios fell at least 21 percentage points from 2007 to 2012, according to data compiled by Bloomberg.
While lawmakers approved a pension-repair bill Dec. 3 that would save the state $145 billion over the next 30 years, a coalition of unions has challenged the law’s constitutionality in court.
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