The state of the State

By F. MARK SIEBERT and MARGARET S. KNOEPFLE

Tax climate temperate, but forecast uncertain

IF the Illinois Taxpayers' Federation were writing soap operas instead of biennial reports, "The Calm Before the Storm" might be a good title for its most recent one. It covers fiscal years 1982 and 1983, the period of fiscal crisis just before a series of new state taxes was levied. Entitled Illinois Tax Climate, the report documents the end of a 13-year era during which a tight lid on state taxes more than balanced out-of-control local taxes.

If a good tax climate is one in which overall growth in taxation does not exceed overall growth in personal income, then Illinois remained well within the temperate zone during those years. That is one conclusion that can be drawn from the report. The other is: It may be hard to stay there.

The balance between taxes and income will be affected by the new state levies, and there seem to be few signs of relief at the local level. Factor in the sluggish growth of personal income in Illinois, and the present tax climate might be read as unsettled and unpredictable.

Covering the two years of recession and shrinking revenues ending on June 30, 1983, the data show how Illinois held the line while other Great Lakes and industrial states were raising taxes. As a result of holding that line, Illinois' tax climate, particularly during 1983, was positively balmy. But economic recovery that the state was counting on did not come fast enough.

Ironically, June 30, 1983, was the very day that the state's tax weather, if not its climate, took a sudden turn. To keep from going broke, Illinois imposed a temporary increase in its income tax and a permanent increase in its sales tax. Since then there have been several major changes in state taxes, including new permanent taxes and new exemptions.

Along with the permanent increase in the sales tax, hikes in the state's motor fuel tax rates have been phased in; registration fees for cars and trucks have been hiked; the state's sales tax on soft drinks has been reimposed. There is a new tax on the sale of motor vehicles between individuals and on the transmission of interstate messages. In October, when the ink on Illinois Tax Climate had barely dried, a hike in the state cigarette tax was approved.

Post-fiscal 1983 tax reductions listed in the report include the elimination of the state sales tax on food and drugs and on replacement parts for manufacturing machinery and equipment. In addition, homeowners received a new income tax deduction for property taxes paid. Changes in the way the state utility taxes are applied — from price to usage — were also approved this year, but it will take a couple of years to assess the result.

Illinois, along with Texas, the other major state that held out on tax increases, has finally been forced to raise its taxes and enter the venturesome 1980s. Meanwhile, states which increased their corporate and personal income taxes three or four years ago are now hastening to reduce or repeal them.

The 1981-1983 data, though obsolete in some senses, are quite valuable. They show how Illinois stacked up against 15 other states in those difficult years. Illinois ranked lower than average in taxes on personal income, corporate income and motor fuel. It was much higher than average in local property taxes and utility taxes; in fact, Illinois ranked fifth in the nation in property tax receipts per $1,000 in personal income and fourth in utility tax receipts. The latter include both state and local utility taxes. As for personal income growth, Illinois' was at its lowest in 12 years, a mere 3.2 percent. Nevertheless, Illinois managed to improve its overall tax climate by controlling tax growth and providing tax relief at the state level.

By 1983 Illinois' state and local taxes per $1,000 of personal income had dropped by almost 6 percent. Nationally, the drop was less than 2 percent. For industrial states as a whole, there was an increase of almost 2 percent, and for the other Great Lakes states there was an increase of more than 3 percent. The federation sees this as a considerable achievement for Illinois.

The report also lauds the legislature's apparent commitment to maintain the low and flat rate income tax — as indicated by its decision to impose only a temporary income tax increase. On the corporate tax front, it notes that Illinois finally managed to puts its corporate income tax laws concerning unitary apportionment on "a firm footing" and to stick with that policy.

Local taxes, however, remained a major threat to tax equilibrium as of 1983. Illinois, where local tax collections accounted for 48.5 percent of total state and local collections, was second only to New York and much higher than the average among industrial and Great Lakes states. Nationwide, local governments collected 39.8 percent of total state and local taxes. In 1983 local tax collections in Illinois were 12 percent higher than in 1982, while state tax collections actually declined by 0.1 percent. The 50-state average showed similar results but not such an extreme contrast: Local taxes increased 9.2 percent, while state taxes went up 5.4 percent.

The local tax situation was particularly worrisome in Chicago and Cook County. Chicago residents grappled with an 8 percent sales tax and a 13.08 percent levy on utility services. Chicago businesses paid an employee head tax of $5 per employee per month. Cook County has a unique real estate classification system where commerial and industrial property in 1983 constituted 56.4 percent of the county's tax base. In that same year, the county's 554 taxing districts collected an awesome 52.4 percent of all the real estate taxes paid in the state.

This was the federation's 11th bienniel report. Issued in the midst of what it called a "remarkable numbeer of tax changes across the nation," its 12th report mav document the effects.

6/January 1986/11linois Issues