$22.1 billion budget and 'revenue positive tax reform'

Gov. James R. Thompson proposed a $22.1 billion budget for state government next year. A 7.7 percent boost in appropriations is fueled in large measure by "revenue positive tax reform," a term that means different things to different people. For taxpayers it means tax hikes next year partially offset by reductions in later years. For state agencies and state-financed programs it means more money, but often less than they had sought. For lawmakers it means a thorny tax hike vote. For local governments it means a piece of the revenues from the tax increases. For those who would ultimately receive the new revenue, from road builders to bond lawyers to welfare mothers, it means income. For everyone concerned, it means a busy spring of proposals and counterproposals. For some it recalls the legislative reshaping of Thompson's 1983 tax hike proposal. Overall Thompson's tax package this time would raise state income, sales and gasoline taxes and license plate fees by $1.1 billion for the year beginning July 1. In the general funds the tax increases would generate $800 million, on top of $313 million in inflation related growth. The revenue positive part of the income tax comes as a 20 percent hike in the inividual income tax rate, with the rate scheduled to rise from 2.5 to 3 percent on July 1. The tax reform aspect of the income tax would appear in January, when the personal exemption is boosted fron $1,000 to $1,250, a savings of $7.50 per dependent for the 1988 tax year. A year later, on January 1, 1989, the exemption would be increased again, to $1,500. The boost in the personal exemption is most advantageous to low income persons. It falls short of the $1,000 per person hike advocated four years ago by an eariler tax-reform panel, the Furman Commison.

Thompson proposed no increase in the 4 percent corporate income tax rate. "We want to advertise ourselves as a state hospitable to business," he said. The Illinois Constitution protects corporations from excessive income tax rates by specifying that the ratio between corporate and individual rates may not exceed 8:5. Currently the 4 percent corporate income tax rate and the 2.5 percent individual rate are exactly at the 8:5 ratio. If the 3 percent individual income rate is approved, the corporate rate could be increased anywhere between a 4.1 percent tax and a 4.8 percent tax and not violate the constitutional ratio.

When taxpayers begin to enjoy the benefit of the higher personal exemptions, they would be hit with a new sales tax on services. On January 1, 1988, the govenor proposes to begin taxing personal, repair, amusement and business services. Citizens would pay tax on dry cleaning, trips to beauty and barber shops, shoe and auto repairs, theater and baseball game tickets, to bowl or play golf, and for advertising, accounting or window cleaning services. Doctors' and lawyers' services would not be taxed. Thompson said he was reluctant to tax health services and feared taxing lawyers and not doctors would make the law unconstitutional. As it stands, there would be no sales tax for a tax return prepared by a Certified Public Accountant, but there would be one for a return done by H&R Block. The governor says he expects a legal challenge to the sales tax on services.

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The reform portion of the sales tax comes a year later. On January 1, 1989, the state sales tax rate would be reduced 10 percent, from 5 to 4.5 percent. Higher state income taxes mean lower federal taxes for state residents who itemize on their federal return. The $250 net increase in state income taxes for a family of four with an income of $60,000 would be partially offset by a $70 reduction in federal income taxes. Federal tax revisions have eliminated the deductibility of sales taxes.

Thompson also formally proposed increases in the state's motor fuel tax and on license fees that he had unveiled earlier and were already under attack. The five-cent-a-gallon gasoline tax hike would raise $189 million in the year that begins July 1. Boosting the cost of license plates would raise another $79 million. Both are part of a five-year, $1.75 billion increase that would fund a series of road and mass transit improvements.

And Thompson followed through with his promise to propose expansion of the Build Illinois program. Boosting it from a $1.3 billion to a $2 billion program would provide money to help municipalities build and expand sewage treatment plants. A portion of the state sales tax would pay the bonds, but the $35 million in sales tax receipts lost by the general funds would be made up with new taxes on nonprescription medicine and computer software.

Thompson told members of the General Assembly that his was a "crossroads budget" and that Illinois was in a "crossroads year." He asked lawmakers to look not at his proposed tax increase but instead at his budget priorities. "If you approve of the answers to the critical questions facing this state, then together we must also find a way to pay for them."

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Thompson said he was convinced money was needed to improve schools, to launch welfare reform programs, to protect citizens, to enhance the environment and to assist the disabled and mentally ill. He laid the state's cash problems to new programs enacted by legislators and signed into law by himself that ate up natural revenue growth and drew down reserves. "Now, however, we face the choice between abolishing these, and other new initiatives, or paying for them. I have chosen to keep and pay for them. They are important to the lives of 11 1/2 million citizens in this state. The final choice is yours."

The winners in terms of appropriation increases were:

• Department of Public Aid, $286 million, of which $100 million would go to pay rising medical service costs, $18.1 million would pay for a 3.2 percent increase in basic grants and $16.7 million would fund the Project Chance welfare-to-work initiative.

• Elementary and secondary education, $195 million, including $62 million for pre-school programs for students judged at risk of failure and $93 million in general state aid, a figure far below the $350 to $500 million some educators say is necessary to rewrite the school aid formula.

• Higher education, $100 million, nearly half of it pegged for 6 percent salary hikes for faculty and staff.

Also winners were local governments, which will share in the broadening of the sales tax base and the higher income tax receipts to the tune of $113 million next year, and more in 1989.

Thompson said he expected controversy and clamor. He got it. Business groups urged belt tightening instead of tax increases. For educators there was too little money. Reg Weaver, president of the Illinois Education Association, gave the budget a grade of C because of the low percentage of new revenues earmarked for education. The Illinois Campaign for Family Stability said a 10 not 3.2 percent increase in Public Aid grants was needed.

Thompson's second consecutive post-election tax hike proposal drew predictable opposition from Democrats. Comptroller Roland W. Burris told lawmakers, "We must work together to curb the governor's hearty appetite for big spending." House Speaker Michael J. Madigan (D-30, Chicago) charged the Revenue Committee to review of the state's income structure, including tax breaks that had cost Illinois $4.3 billion since 1983. "[T]his occasion must be viewed as the second failure of the Administration's existing system of budget making and revenue forecasting," Madigan told the committee. Nor did the governor get words of encouragement from Republican legislative leadership. Senate Minority Leader James (Pate) Philip (R-23, Wood Dale) said he would not sponsor the governor's tax increase bill as he had in 1983. Republican State Chairman Don Adams heard complaints, too.

"Serious concerns have been registered with me regarding the magnitude and scope of these tax increases," Adams said.

The only group to support the increase was the American Federation of State, County and Municipal Employees, the union that represents many state workers. Even they suggested modification and said the corporate income tax should be hiked.

Despite the public opposition, insiders acknowledge privately some tax increase will probably be necessary. Budget Director Robert Mandeville says the state expects growth from existing revenues of $313 million, but says Illinois needs $269 million to stay where it is because:

• The $69 million drawdown of reserves can not be repeated.

•$100 million borrowed this year must be repaid with $4 million interest.

• Higher state spending is needed to prevent loss of $96 million in federal funds for the Department of Public Aid.

Mandeville's figures mean that despite the negative reaction to Thompson's proposal, some increase in taxes is almost positive. There will be hearings, rhetoric and closed meetings before the full legislative response to revenue positive tax reform is known.

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