The state of the State

Political economics keeps tax hike temporary

By DIANE ROSS

WHEN Gov. James R. Thompson announced January 25 that he would neither seek nor support an extension of last year's temporary increase in the state income tax, the No. 1 issue of the General Assembly's election-year session dissolved. Predictions for the spring 1984 session went from the dramatic to the dull, the game plan from risky to safe. No mystery, no confrontation, no summit this year; no sequel to the Great Tax Game of 1983.

Extending the increase in the state income tax beyond its expiration date this June 30 had been the No. 1 issue in Illinois since the temporary increase was enacted last June 30. The debate became heated in November when solving the crowding problem in state prisons forced the General Assembly to spend more than budgeted for fiscal 1984. Then, in December, a federal district judge ordered the Illinois Department of Public Aid to pay hospitals who serve Medicaid patients at a rate higher than that appropriated for fiscal 1984, and to continue to pay at the higher rate in future years. (The court order, which is designed to enforce the federal standard for paying all Medicaid providers, means Illinois can no longer appropriate what it can afford, but must now appropriate what it owes.)

The suspense built when Thompson postponed his annual State of the State address from January 10 to February 8 to buy time to study the fiscal situation. The pressure mounted in January when state schools Supt. Donald G. Gill said elementary and secondary education needed $472 million more in general funds for fiscal 1985. The Illinois Board of Higher Education was already planning to give faculty a 7 percent payraise. The decision on extending couldn't wait until February 8.

On Tuesday morning, January 24, Thompson said he would announce his decision the next day, the day President Ronald Reagan was scheduled to deliver his annual State of the Union address. Apparently it was not until Tuesday night, January 24, that Thompson finally made his decision: No extension. It wasn't "necessary." It wasn't "right."

Politically, Thompson had no choice: This is an election year. Republican Minority Leaders James A. "Pate" Philip in the Senate and Lee A. Daniels in the House were adamantly opposed to an increase. With no Republican support in sight, Democratic Senate President Philip J. Rock and House Speaker Michael J. Madigan saw no reason to seriously consider an extension. Rock, who wants the Democrats' nod to take on U.S. Sen. Charles H. Percy, was already pushing an alternative: amnesty. In the wake of a successful program in Massachusetts, Rock had come up with a bill to create a one-time program in Illinois, offering amnesty to taxpayers who owe the state an estimated $250 million in delinquent taxes.

Rock's position was based on his own candidacy among Democrats, and Thompson had to consider Reagan's key positions. The governor could hardly call for an extension of a state tax hike — on the grounds that the economy hasn't recovered enough to generate more revenue — when the president is running on a record of economic recovery.

Thompson may have been right politically, but as far as providing the money to run government, he is gambling. The continuance of the national recovery seems likely, but the Illinois economy is still sluggish, to say the least. When Thompson announced his decision against an extension, he was careful not to rule out the possibility that he might be forced to call for another state tax hike later — should the state economic condition worsen.

A permanent extension would have solved Illinois' fiscal problems for the three years remaining in the governor's current term. Gaining that kind of freedom seemed possible last spring when the governor's proposal for a permanent increase was the only one on the table. If his proposal had been approved, he would have had "new money" every year: $477 million in fiscal 1984, $533 million in fiscal 1985, $423 million in fiscal 1986 and $391 million in fiscal 1987. "New money" in any quantity now seems to be out of the question.

When Thompson announcd his decision January 25, he did not talk about the state's long-term financial health, nor did he mention an overhaul of the state's tax structure as proposed by the Furman Commission. He was simply answering "yes" to a seven-month-old question: Will the tax package of fiscal 1983 bridge the gap from recession to recovery in fiscal 1984? In effect he was saying that the combination of the temporary, 18-month increase in the state income tax and the permanent increase in the state sales tax, starting January 1, 1984, would generate enough revenue to cover spending with a few million to spare.

In contrast, a year ago, when the tax package was first proposed, the gap between recession and recovery seemed to be growing wider. The recession had reduced revenue again and again. Seven months into fiscal 1983, the General Assembly had legalized the manipulation

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of the balance in the general funds to borrow from other funds, and had made unprecendented across-the-board cuts in what had been "final" appropriations. By the eighth month, more was cut from the state's contribution to its employee pension funds, and a line of credit was established to borrow from banks.

A year later, revenue was still the story, but it's a "good news" story. Seven months into fiscal 1984, the original estimates were still accurate — just as the governor's Bureau of the Budget (BOB) and the legislature's Economic and Fiscal Commission (EFC) had said they would be, when the estimates were made last July. The accuracy of the revenue estimates for fiscal 1984 may be a sign that the state economy has begun to recover; the BOB and the EFC haven't had such faith in their figures since before the 1979-1980 recession.

Here's the status report on fiscal 1984. The BOB's January estimates put revenue at $9,584 billion, exactly where they put it in July. During the same six months, the EFC raised its estimate by $17 million to $9,581 billion, within $3 million of the BOB. (See table 2.)

The first revenue estimates for fiscal 1984 were made in July, after the passage of the final tax package. Compared to the kind of revisions the BOB and EFC were making a year ago, there was only one significant change when the estimates were updated as usual in October and January. By January one of the two key, nontax parts of the revenue picture had disappeared. Because of increases in the estimates for the sales and inheritance taxes, Thompson had not found it necessary to use the power the General Assembly had given him to borrow $100 million from other funds. In the BOB's July revenue estimates, director Robert L. Mandeville had found only $75 million would be available; in the October estimates, he figured only $50 million would be needed. It was not.

The other key, nontax portion of the revenue picture is still included in the January revenue estimates. Thompson has borrowed the last $50 million that was left on the $200 million line of credit established in fiscal 1983.

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On the spending side, the BOB's projections put general funds spending for fiscal 1984 at $9,579 billion, again exactly where it had been in July. That means revenue should run $5 million ahead of spending, according to the BOB ($2 million according to the EFC). The balance in the general funds should edge up to $115 million (BOB) or $112 million (EFC) by June 30. In January there didn't appear to be any spending crises developing for the remaining months of fiscal 1984. During the first six months, however, there had been a couple of problems that had threatened to unbalance the budget by nearly $50 million. To help solve the crowding problem at state prisons, the General Assembly had passed $16.5 million in supplemental general funds appropriations during the fall session in November. Due to the federal court order in December, the Illinois Department of Public Aid will have to pay hospitals who serve Medicaid patients $60 million more than originally appropriated, although half of that will be reimbursed by the feds. But since Thompson didn't need to borrow from any other funds, he didn't have to repay any loans. Mandeville said the money that had been set aside to repay such loans will be enough to cover prisons and Medicaid — and another $63 million the General Assembly authorized during the fall session (see "Legislative Action," February 1984, p. 31).

For the record, "final" appropriations for fiscal 1984 total $16.163 billion in all funds, $8.861 billion in the general funds (see table 1). In the general funds the General Assembly had appropriated $8.879 billion at the end of the spring session. Thompson vetoed only $16 million; the General Assembly overrode only $6 million, but went on to pass about $50 million in supplemental appropriations, including those for prisons. Legislators also overrode vetoes of substantive bills that could cost the state another $23 million.

What's the prognosis for fiscal 1985? It's very doubtful that revenue will be higher, but most of the loss due to the expiration of the increase in the income tax will be offset by the gain due to the "annualization" of the permanent increase in the sales tax. (Collections at the higher rate will be first received this March.) On the spending side, fiscal 1984 took care of some onetime obligations, chiefly the repayment of the $200 million to banks, and finally catching up on state aid to schools, whose year-end payment has been deferred for two fiscal years. Speculation aside, Thompson's priorities for spending what "new money" he will have in fiscal 1985 will be spelled out when he unveils his budget March 7.

Table 1
Illinois fiscal year 1984 appropriations budgeted, passed, vetoed, overridden and approved (as of January 1984)
(thousands of dollars)

¹ The amounts shown are from the budget Gov. James R. Thompson introduced March 2, 1983, prior to the General Assembly's passage of tax increases.

² The amounts shown are those the General Assembly appropriated after passage of the tax increases.

³ The amount of general revenue funds shown for elected officials includes $210 million appropriated for Treasurer James H. Donnewald to repay $200 million the state has borrowed via a line of credit established with banks in fiscal 1983. The appropriation covers the $150 million borrowed in fiscal 1983, $50 million borrowed in fiscal 1984 and $10 million due in interest. Source: Bureau of the Budget, January 3, 1984

Table 2 Revenue in the general funds in fiscal years 1983 and 1984: Actual receipts,' projections
and revised projections by the Bureau of the Budget and the Economic and Fiscal Commission
(in millions of dollars)

¹ My projections were the first made for fiscal 1984 after the General Assembly's passage of tax increases.
² Projections include $75 million from interfund transfers as authorized by the General Assembly and $50
million borrowed from banks via the state's line of credit established in fiscal 1983.
³ Projections dropped interfund transfers from $75 million to $50 million, but included $50 million from
banks.
⁴ Projections no longer included interfund transfers, as they were unnecessary, but included $50 million from
banks.
Source: Actual figures from the comptroller; projected and revised figures from the Bureau of the Budget
and the Economic and Fiscal Commission

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