The state of the State

Tax hike strategies

By MICHAEL D. KLEMENS

Gov. James R. Thompson has set out to convince lawmakers, interest groups and voters that Illinois is at a crossroads and needs a tax hike to move into the future. Although Democrats point out that this is his second consecutive post-election tax increase, there are contrasts that will make the governor's sales job harder. Illinois is not in the dire fiscal straits it was four years ago, when the bottom fell out of state revenues. In 1987 revenues are growing steadily, but slowly. For two years Illinois has been spending more money than it has taken in, but there have been none of the belt-tightening measures that marked 1982. "This year there's no pain out there," a legislative staffer noted.

Thompson is taking a different approach to convincing lawmakers and voters to hike taxes. In 1983 he started with a "doomsday" budget, showing cuts that would have to be enacted without a tax increase. This year Thompson introduced a budget in March that assumed revenues from the $1.1 billion 1988 tax increase. A month later he unveiled the cuts that would have to be made if no tax increase were forthcoming.

The difference was planned, according to James Reilly, deputy governor and one of Thompson's salesmen. "In general it seemed to us that the strategy in 1983 didn't work very well," Reilly said. It did not present early enough the programs that could be bolstered with a tax increase. This time the administration's strategy called for outlining the benefits of the tax increase package to groups across Illinois in March. That emphasis was to continue in April along with setting out program cuts if no tax increase were enacted. In May, Reilly said, the governor will enlist support of interest groups, and in June he will work out agreements with legislators.

Through March, the governor followed that plan. "I think the first phase of this went fairly well. He [Thompson] was able to get audiences to listen to the case," Reilly said. The sales campaign that took Thompson from Carbondale to Rock Island to Champaign was hardest on the budget book he carried with him. The governor dramatized spending cuts for his audiences by ripping pages from the book.

Although the message was the same as in 1983, the style was different. For example, on April 2 Thompson sat around conference tables with the Board of Governors of the higher education governance system and quietly asked members for their help. "I think we need a frank recognition in the State of Illinois today that the plans of this budget to invest in our future by investing in higher education are important.'' Then he moved to an adjacent conference room at Springfield's Ramada Renaissance, stood before the Illinois Retail Merchants Association and made a more animated pitch for their help. Thompson argued that Illinois must spend money for education, economic development, welfare reform and human services. He received a pledge to work out a package that would meet state needs and keep merchants competitive. "I'll take it," the governor shot back.

With Thompson accentuating the positive, his staffers spread the bad news. On April 1 Reilly and Robert Mandeville, director of the Bureau of the Budget, outlined program cuts necessary if no tax increase were forthcoming. "The governor is more properly the one selling the positive," Reilly said.

Mandeville and Reilly detailed how general funds revenue could grow $313 million without a tax increase, and still leave Illinois $156 million short next year. From the nominal revenue growth, Mandeville explained, must be subtracted the $69 million current year deficit, $104 million to repay money borrowed this year and $96 million in federal aid that will not be available without a tax increase. Those numbers were identical to his March 4 figures and would leave the state with $44 million for new programs.

8/May 1987/Illinois Issues

But Mandeville took the numbers a step farther in April than he had on budget day, March 4. He also subtracted $100 million for corporate income tax refunds and $100 million for medical payments provided to the poor. In both cases, he said, the state has extended the time for making those payments. Some corporate income tax refunds now take more than a year to be paid. Doctors, hospitals and nursing homes was as long as 34 or 35 days for payments; the contractual limit is 30 days. Mandeville acknowledged some might choose to retain the delays rather than cut programs. His view, "I think we should pay our bills on time."

Thompson also wrote lawmakers, telling them that he had not proposed the increase lightly. "Only when I saw the results of no increase — holding FY88 spending at FY87 levels — was I convinced of the need for the package I have proposed.'' The result of holding revenues constant, the governor said, would be program reductions. To convince lawmakers, Thompson detailed how $831 million would be cut from his spending plan if taxes are not hiked. He contended the cuts would hurt school children and the mentally ill, reduce college scholarships and could force closure of a prison. He warned:

"Our funding commitment for education reform will lapse in only the third year.''

"Staff who care for the developmentally disabled and mentally ill will be reduced to a level less than anytime in the past decade."

"Security levels at the state prisons will be reduced and community correctional centers will close."

Cuts outlined by Thompson in the budget program he had proposed a month earlier included $286 million for public aid. $195 million for elementary and secondary education and $107.5 million for higher education, $63.6 million for mental health and $30.1 million for corrections.

Legislators are not buying the cuts. "He's saying either take his package or it's doomsday. He's just making idle threats because a lot of people are going to say 'so what,' " said Sen. Kenneth Hall (D-57, East St. Louis), chairman of the Appropriations II Committee. "My mail is running 99 to 1 against the hikes because they feel that they have been deceived," said Hall. "You'd better have a suit of armor around here if you talk about tax hikes."

Hall's committee and Sen. Howard W. Carroll's (D-l, Chicago) Appropriations I Committee have told state agencies they want them to propose budgets assuming no tax increase. Hall said he thinks such a reduction can be made without gutting programs. If convinced of the need for a tax increase — and Hall emphasized he stood unconvinced in early April — the fairest tax to hike would be the income tax, he said.

The committees have also presented a number of questions to the administration about what it calls the "Thompson Tax Increase" and the "Thompson Tax Budget.'' These questions and their answers may establish the framework for the debate over taxes. The committees want to know:

• What recommendations of the Governor's Cost Control Task Force have been implemented and how much they will save in the coming year.

• What kind of review of programs has taken place and whether any were eliminated or cut back.

• Why elementary and secondary education got 40 percent of new revenues last year and are only proposed to get 17 percent in the coming year.

• What happens to revenue growth in 1990, the third year of Thompson's "multi-year funding plan."

• What limitations will be put on the Department of Transportation's operations paid from the Road Fund.

In the House the attitude was little different. "What is really impressive with this budget — there's $1.6 billion in new revenues and it doesn't make anybody happy," said Rep. Woody Bowman (D-4, Evanston). "The whole budget, both on the revenue and on the expenditure side, is a disaster. There's no doubt we'll try to impose our priorities," Bowman said.

And, Bowman said, the reluctance of legislators to vote for a tax increase makes for a tight budget. Even those who will vote to hike taxes, he said, may want a lean budget to convince constituents of their frugality. "People may be more restrained in asking for pork," Bowman suggested.

Lawmakers are preparing to wrestle with priorities. The Thompson administration has proposed its cuts, and it has issued a challenge to those who don't like them. "The burden is on those who like neither these cuts, nor a tax increase, to propose an entire, balanced, alternative no-tax budget," Thompson wrote lawmakers.

In the first month after Thompson proposed his budget two alternatives were suggested. The American Federation of State, County and Municipal Employees (AFSCME) wants higher taxes and more aid to local governments, and a group of conservative Republicans wants lower income taxes.

The union's plan added to the Thompson proposal an increase in the corporate income tax from 4 percent to 4.8 percent, a corporate minimum tax and an extension of the proposed service tax to lawyers, accountants and architects. AFSCME, the state's largest public employee union, also proposed paying one-tenth instead of the current one-twelfth of income tax receipts to local governments. It also proposed enacting an earned income tax credit to drop low-income taxpayers from state rolls. The union estimated that the plan, in all, would generate $130 million more next year than Thompson's plan.

Taking an opposite tack was a coalition of conservative Republican lawmakers who mounted a "Just say no! to tax increases" campaign. The alternative outlined by Rep. Bernard E. Pedersen (R-54, Palatine) called for doubling the state income tax's personal exemption to $2,000. Pedersen reasoned that would offset the "windfall" that will flow to Illinois because of federal tax changes. The exemption increase would trim state revenues by $270 million, but administration and legislative estimates of the federal windfall stand firm at no more than $150 million. Pedersen cited a figure of $200 million.

Everyone agrees June 30 remains a long way off, but some suggest the "so what" that Sen. Hall hears may not be unique. One observer noted that not even the Thompson budget reductions caused a front page stir. Four years ago it was clear to all that a tax hike was needed, recalled Barbara Flynn Currie (D-26, Chicago). "The politics of scarcity was well underway, even before the tax hike of 1983." That is not the case this year. Thompson told lawmakers the cuts he outlined represent an "unconscionable betrayal of Illinois' future." Now he must convince them.

May 1987/Illinois Issues/9