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By MICHAEL D. KLEMENS

Hartigan v Edgar on taxes and state finances

This is the first in a series of four interviews with the gubernatorial candidates Neil F. Hartigan and Jim Edgar that Illinois Issues will publish. The candidates have agreed to a schedule that calls for three more interviews that will appear in our August-September and October magazines. Future topics will include education, human services and economic development. Jim Edgar was interviewed for this article on May 31. Neil Hartigan was interviewed June 1.

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Neil F. Hartigan
Democratic candidate for governor
State finances are inordinately complex and indisputably consequential. Money determines the most fundamental questions of politics, "Who gets what?" and "Who pays what?" The complexity of state finances makes questions of taxation and spending difficult to consider during election campaigns. Politics makes those discussions even harder. Raising taxes angers some people; cutting programs angers others. And because making people angry is not the best way to win their votes, the underlying issues of public finance are seldom discussed during political campaigns.

To the inherent reluctance to take on tax and spending issues you can add uncertainty over the mood of Illinois voters this year. Atty. Gen. Neil F. Hartigan, a Democrat, and Secy. of State Jim Edgar, a Republican, are seeking the state's highest office in a year in which the phrase "tax revolt" is in the winds. There are conflicting analyses of whether the revolt is for real and how widespread it is. "I think the disgust with government is for real." says Hartigan. The Democrat says that voters feel that things are out of control and that government does not pay attention to its citizens. Edgar sees the tax revolt as a reaction to property tax increases in the six-county Chicago metropolitan area: "That's not to say that people statewide are happy with what they pay in taxes and think they're getting their money's worth, but it's not as intense as it is in the metropolitan area on property taxes."

Few large differences and fewer concrete and substantial initiatives have emerged in the race between Edgar and Hartigan. In 1989 both candidates supported the temporary income tax increase. Now both candidates support the Tax Accountability Amendment that was spawned from the backlash to that temporary increase. Both propose to use business principles to cut government waste. And both identify education as their top spending priority.

The most notable exception to the similarities is the income tax surcharge. The next Illinois governor be it Hartigan or Edgar will be embroiled in a tax battle as soon as he takes office. The 20 percent temporary income tax rate increase (the surcharge) expires on June 30, 1991. If it is not continued, the personal income tax rate will drop from 3.0 percent to 2.5 percent and the corporate rate will fall from 4.8 percent to 4.0 percent. The money raised was split between education and local governments. A share was retained by the state to make up for revenue lost by doubling the property tax deductions on state income taxes, a piece added to the surcharge package to provide the "property tax relief" needed to find the votes to pass it. Edgar supports extension of the surcharge. His top concern is for education. He says that some property tax relief will probably have to be included to find the votes to extend the surcharge. He also predicts that in the negotiations to continue the tax, local governments will retain some portion of the $300 million they got this year.

12/July 1990/Illinois Issues


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Jim Edgar
Republican candidate for governor
Hartigan opposes continuing the portion of the surcharge for local governments. He claims that he had forewarned local governments that they needed to spend the money for tax relief and that they did not heed his warnings. He says the issue is that local governments did not heed his warning, not whether it would have been prudent for local governments to reduce property taxes based on a temporary increase in state money. Hartigan has not decided whether he will support the extension of education's half of the surcharge, but he has promised to make that decision before the election. He does believe that the doubling of the property tax deduction on the income tax needs to be continued, and Hartigan also says the state will have to find more money to share with local governments whether or not the surcharge is continued.

There is one other difference. Edgar has pledged, if elected, not to raise taxes for four years. He does not consider the extension of the surcharge an increase. Hartigan has promised to roll back at least half of the surcharge and to cut spending. But he has made no pledge comparable to Edgar's "no tax increase for four years.'' Hartigan maintains that it would be irresponsible to do so before he analyzes state spending.

The surcharge has been and will continue to be debated throughout the fall campaign and into next year's legislative session. More complex public policy questions remain and have been and will continue to receive less attention. Under Thompson, Illinois state finances have been a series of crises. Thompson arrived to find the state broke in fiscal year 1977. In fiscal years 1982 and 1983, as the Illinois and national economies slid into recession, the state suffered another crisis. Fiscal problems struck again in fiscal years 1987 and 1988 when the economy was coming out of recession and again in fiscal year 1990 when economic growth was moderate.

Edgar sees nothing unique in the ups and downs of state finances. He says other states go through the same thing and that Illinois went through it in the Kerner and Stratton administrations. "We're always going to have those cycles, and there's never going to be enough money for all the programs people would like funded. They're going to feel there's not enough money and we ought to raise taxes."

Edgar says that the state needs to discipline itself in spending money. To that end he has proposed a five-point program that calls for:

1.  A return to budgeting for a two-year period (biennial budgeting), a switch that he says would get state government away from constant budgeting and allow long-range planning.

2.  A requirement for a three-fifths vote to override the governor's item reduction veto, instead of a simple majority.

3.  A pledge that there will be no net increase in state employment in agencies under the governor's control.

4. Creation of business advisory committees to help set goals and evaluate performance for state agencies.

5.  A promise to veto new programs that do not have a sunset clause and do not have an identified multi-year funding source.

Edgar's proposals are specific but not without shortcomings. Biennial budgets mean biennial revenue forecasts. On May 31, the day of the interview, the governor's Bureau of the Budget and the legislature's Economic and Fiscal Commission were $150 million apart in their revenue estimates for the year that would begin 30 days later. A week later the legislative commission dropped its estimate further, and the two forecasting entities were $178 million apart. Edgar says that it might be necessary to adjust budgets based on changes in the economy but that such adjustments are common already. He maintains that there were no more adjustments when Illinois used the biennial system 20 years ago than there are today. He says that when the change was made to annual budgets there was anticipation of better management. That hasn't happened, he says.

Edgar's proposed cap on the number of employees is also unrevolutionary. The number of employees under the governor has increased from 61,586 when Thompson took office to 62,731, an increase of 1,145 or 1.9 percent. Edgar acknowledges that employees will need to be added to staff new state prisons and to increase the number of child abuse caseworkers. The new workers will have to be offset by jobs cut in other areas or from other parts of the same area. Edgar cannot say how many new jobs he will need or where the offsetting cuts will come from. He argues that the state needs targets that the press and public can identify and to which they can hold public officials accountable. "There's no way you're going to get people to bite the bullet and do this and put up with all the anguish unless everyone knows up front that this is a campaign promise, and they know the guy up there has got to keep it. No excuses," Edgar says.

While Edgar sees nothing unusual in the ups and downs of state finances, Hartigan sees plenty wrong and blames most of

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it on Gov. James R. Thompson. "There is no focus; there is no vision of what the role of state government is. I don't think anyone can find a public policy in any area that I'm aware of,'' Hartigan asserts.

Hartigan says that he would begin by deciding where Illinois should be headed in the 1990s and into the 21st century, then decide what state government's role is in helping it get there. He says the highest priority of government is education and identifies other basic responsibilities as public safety, health care and transportation. Hartigan would assess where the state stands in meeting those responsibilities, determine the resources and set priorities.

Edgar sees the Tax Accountability Amendment as a way to assure that both Republicans and Democrats have something to say about tax increases

Hartigan says that upon taking office he will conduct studies of the state's 277 boards, departments and commissions to eliminate inefficiencies, get rid of programs that do not work and identify programs that do work. He would employ the auditor general's findings he says there are 12,886 findings and research by legislative staff to decide how agencies and programs are working. He would bring in outside experts and ask clients to evaluate the effectiveness of the programs. Hartigan says that it would take two years to complete studies of all agencies and to create budgets based on those studies, but that he would try to target two agencies in his first budget.

But Hartigan is not yet ready to name specific or even likely targets of his cuts. His campaign strategy calls for raising such issues in September and October, when voters are paying closer attention to the campaign. He mentions the Department of Commerce and Community Affairs as an area of potential cuts. He says that with two-thirds of the lawyers in state government outside the attorney general's office, he would push for consolidation of legal services under the attorney general. And he says that he would oppose large consulting contracts like the $1 million contract that Mike Jones, former director of the Illinois Lottery, received to promote the horse racing industry.

Besides his own budget problems, the next governor will also have to contend with taxpayers' demands for relief from property taxes levied by local governments. The 1989 July tax bills sparked complaints in Chicago and brought demands for relief to the General Assembly. The problem has shifted to the suburbs this year. And state lawmakers and the governor, who do not levy property taxes, are being pressed for solutions.

Edgar sees the property tax problems centered in the six-county Chicago metropolitan area where property values and assessments have been on the increase. "If you're sitting there trying to pay your taxes and your income went up 4 percent but your property taxes went up in some cases in the north part of Cook County, 100 percent I think there are some real problems." Edgar's solution is a proposal to limit tax levy increases to 5 percent or the rate of inflation, whichever is lower. Excluded from the computation would be the increased assessment based on new construction. Edgar says the plan will not provide relief so much as it will ease further sharp tax increases and make payment of property tax increases manageable for homeowners. The Edgar plan was introduced in the General Assembly and as of mid-June had met the same fate as every other property tax measure that had come forward: It had gone nowhere.

Arguably, Edgar's plan is limited. He defines the problem as that of homeowners whose property tax bills were growing much faster than their incomes. He acknowledges that those individuals' wealth is increasing as their property appreciates, but says, "I'm not sure you ought to get hit before you see the money in your pockets so you can pay for the increase in taxes." Edgar's cap does nothing for homeowners in economically depressed sections of the state where property values are dropping and tax rates are being increased to maintain the levy. Those persons are paying higher taxes on property of ever decreasing value. In East St. Louis, for example, the effective tax rate (property taxes divided by market value) is the highest in the state.

A study by the Illinois Economic and Fiscal Commission identified three components of property tax relief. One was limitation on the amount of property taxes that local governments can raise, the form that Edgar's cap proposes. The other aspects identified by the commission were: (1) reforms that would make the whole system more comprehensible to taxpayers and make property taxes themselves more equitable; and (2) replacement, which would shift funding from property taxes onto other sources, probably the income tax.

Edgar said he has seen plenty of attempts at property tax reform in his 20 years around Springfield but that nothing has eased the complaints. "There are just some built-in inequities because there's a value judgment on the value of homes. I think there are always going to be problems." Further, the basic inequity of the tax the fact that it pays for schools that have no relation to property value makes reform difficult, Edgar says.

Replacement is a touchy issue because tax shifts produce winners and losers. Taxpayers also suspect that any shift is a tax increase in disguise, Edgar says. "That has made it very difficult in the climate to get a discussion going on the shift. I think we ought to try that discussion, but I don't want to promise anybody that it's going to occur," Edgar maintains.

Hartigan defines property taxes as a spending issue. He says that too much is being spent, in part because the state and federal governments have been shipping mandates to local governments without the money to pay for them. Overall Hartigan sees the property tax as but a part of the larger tax problem:

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"It's about all taxes. It isn't separating out property taxes from other taxes. The first thing that you do is you get rid of what doesn't work, you keep what does work. You get spending under control." Hartigan says that he will have more specific proposals later in the campaign.

Hartigan first criticizes local governments for not using their share of the income tax surcharge to reduce property taxes. He criticizes state government for treating local government shabbily by sending them mandates without money to pay for them. Finally he criticizes local governments for their spending practices.

While Edgar sees the amendment as a way to ensure bipartisan input into tax increases, Hartigan sees the amendment as a way to reduce spending

Hartigan believes that if the state were more careful in how it spends its money, it would have more to share with local governments. But he says that the biggest change needed is attitudinal. By setting an example as governor he says that he would change attitudes at all levels of government. "Just once give me access to the resources of the governorship. I'll show you how the governor can lead, and I think when the people see that kind of an atmosphere, that kind of a mindset, being applied to government, they're going to demand it of government at every level."

Both Edgar and Hartigan have signed onto the Tax Accountability Amendment, but give different reasons for their support. More than half a million voters signed petitions to put on the November ballot this proposed amendment to the Illinois Constitution that would require a three-fifths vote in each chamber of the General Assembly to pass tax increases or any measure that would increase state revenues. The amendment also sets out required legislative hearings on revenue bills, slows down the process of passing a tax increase and limits legislators' service on revenue committees. The key provision remains the three-fifths vote. The higher vote would strengthen the hand of Republicans who have less than half but more than two-fifths representation in the General Assembly. In part because of this empowerment of the minority the constitutionality of the measure will be challenged in the Illinois Supreme Court by the Cook County Bar Association.

The goal of those pushing the amendment is to make it harder to raise taxes, or more specifically, state taxes, However, state taxes in Illinois are below national averages, while local taxes and particularly the property tax are well above national averages.

Edgar sees the Tax Accountability Amendment as a way to assure that both Republicans and Democrats have something to say about tax increases rather than as a way to prevent tax increases: "It's not going to be a guarantee you're going to hold taxes from ever going up. What it means is you're going to have to have both parties basically agree there's a need." Edgar argues that the 1989 income tax increase was done without Republican input and that had both parties been involved the package would have been a better one. The GOP candidate stops short of saying that the only reason he supports the amendment is because of the way the 1989 income tax surcharge was passed: "It's hard to say what I would have done under different circumstances. I think that is one of the strong reasons for the three-fifths [vote]."

To argue that there was no chance for Republican input on the measure Edgar must overlook the month that House Speaker Michael J. Madigan's (D-30, Chicago) original tax increase bill sat in the Senate awaiting a Republican response to Senate President Philip J. Rock's (D-8, Oak Park) challenge to come up with a better proposal. Edgar also overlooks the defeat of the original Madigan bill in the Senate and the fact that the compromise bill had Republican votes in both the House and Senate. Edgar argues that there was no attempt to work out differences: "The process of compromise never happened. They never really sat down and said 'Let's work this out,' because they didn't have to."

While Edgar sees the amendment as a way to ensure bipartisan input into tax increases, Hartigan sees the amendment as a way to reduce spending: "There isn't anybody in this state anymore who isn't hearing something going on from people in every section of this state about the cost of government, whatever the source of the tax is." And Hartigan says that it makes no difference to taxpayers whether taxes are federal, state or local. "Basically what they [taxpayers] know is that it comes out of their pockets and it's getting tougher to deal with all the time."

The Tax Accountability Amendment would limit revenues. Hartigan says that will in turn limit spending. His first choice would be to control spending, ideally in a way that would assure taxpayers that their taxes were being well spent. Hartigan will not rule out a shift from the property tax to the income tax sometime down the road. "I have a completely open mind," he says. But the Democratic candidate does not think that the amendment will preclude making that shift; it only requires that more lawmakers be convinced.

The office of governor that Edgar and Hartigan are seeking has great control over state spending. The governor gets caught between interest groups who pressure him to increase state spending and taxpayers and lawmakers who want him to hold the line on taxes. Lawmakers have routinely sent the governor budgets that have been out of balance and have left it to him to make the cuts.

In March Thompson proposed to balance his general funds budget for the year that would begin July 1 with $230 million in tax increases and $350 million in deferred spending or replaced spending. Both Hartigan and Edgar criticized the tax

July 1990/Illinois Issues/15


increases as well as the deferred spending that would create holes in the budget the next governor will have to craft.

Hartigan says that if he were governor the state would not have gotten into such financial straits. He says that this spring's budget problems began in 1989 when the state was "spending everything in sight without any view of what tomorrow was going to be. It was Christmas in July," Hartigan asserts that he would have recognized that, given the past pattern of spending peaks and valleys, the state should not have spent its balance down. "You build some sort of reserve other states did it so that when there is a downturn they had some flexibility. This state has never done that."

Ultimately. Hartigan acknowledges that had he been the governor presented with the budget bills, he would have had to veto some of the spending. He could not say specifically which spending approved by lawmakers and signed by the governor he would have vetoed: "Unless you give me the whole range of bills that are there and I'm part of the whole process, it's impossible for me to respond specifically."

Edgar said that if he had been the governor proposing a budget in March he would have sought lower spending levels in his budget address. Edgar says that he could not identify specific reductions that he would ahve made: "It's not my budget." Edgar looks with more favor on the Senate budget plan than on Thompson. Senators elminated the tax increases, cut new programs, and applied reductions of between 1 and 3.2 percent to what Thompson had sought to authorize for agency spending. "I give the Senate higher marks ... At least they sat down in May and tried to come up with something that's workable."

. . . while both candidates are critical of the overspending in the curent year, both supported the 1989 income tax surcharge
Like his opponent, Edgar sees the genesis of the current money troubles in the 1989 spending, but his rhetoric is less critical, saying it is hard to second-guess the governor and legislators. "There was some money and the last nights of the session here in June there were a lot of programs created and things funded that I'm not sure a year before anyone would have thought about doing and probably six months later they wish they hadn't done."

It is worth noting, again, that while both candidates are critical of the overspending in the current year, both supported the 1989 income tax surcharge that permitted some of that spending. The surcharge allowed approximately $400 million in new general funds spending, most of it for elementary and secondary education, on top of more than $1 billion that the state could have spent without the tax increase. Both said they supported the increase because the state was spending too little on education.

Hartigan said the state was providing only 37 percent of the money spent on public schools and needed to reverse the decline. "The only way as a matter of reality that there was going to be additional funding for education was through the surcharge. I thought then and I think now that things had gotten to the point where that had to take place," Hartigan says. He believes there was no chance that the $1 billion in new spending could have been reallocated to provide new money for schools.

Edgar also saw Illinois' spending on education in decline, specifically with state support for elementary and secondary education 44th in the nation and new higher education spending 49th. "We had fallen behind and we needed to rectify that," Edgar says. The GOP candidate says that he supported the temporary tax increase before the decision was made to take bank balances down, a decision he might not have made as governor.

A governor is often judged on whether he puts his money where his mouth is. Both candidates tag their top priority as education. Edgar says that he would hope to see education accounting for a larger percentage of state spending, particularly to close the gaps in spending between "rich" and "poor" school districts. He expects to see the Department of Corrections' share of the budget increase and would like to see some new money to enable the Department of Children and Family Services to spend more on prevention of child abuse. He expects to see the Department of Commerce and Community Affairs (DCCA) receive a reduced share of funding. And he hopes that review of overall state spending would free up some money for education and other priorities.

Hartigan, too, sees education as his No. 1 priority. But without the thorough review that he promises for state spending he says that he cannot say which areas of the budget will see a smaller piece of the spending pie. His priority would be to increase education's share of the pie.

Two big issues divide Edgar and Hartigan on taxes. Edgar would extend the temporary income tax increase, but pledges no new taxes for four years. Hartigan would let the local government half of the temporary increase die and has not decided whether he would extend education's share. Hartigan will not pledge to freeze taxes for four years.

Differences emerge in both style and specificity. Hartigan indicts practices of the Thompson administration; Edgar's criticism of his fellow Republican is gentler. Hartigan says that he would make major changes in the handling of Illinois' finances, but to date has offered no specific programs. Edgar, on the other hand, has offered very specific programs to make relatively minor changes in state tax and spending policy.

Edgar can be criticized for the superficiality of some of his proposals. Hartigan can be criticized for not having specific proposals. Such criticism is not unexpected because public finances are not the stuff of political campaigns.

16/July 1990/Illinois Issues


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