The natural revenue growth that isn't

These are good, nearly boom, times for Illinois tax collectors. For the first eight months of the year money flowed into state coffers at a heady rate. Personal income tax receipts ran $109 million, or 5.5 percent, ahead of last year. Corporate income tax receipts were up $35 million, or 11.4 percent. And through February sales taxes were up $140 million, or 6.4 percent.

With such growth in major state revenues why is there talk of a state tax increase? Why are there charges that there is too little money for schools, abused children and the mentally ill? Did not the July budget cuts correct the sins of overspending and allow Illinois to resume business as usual with natural revenue growth? The answer is simple. Natural revenue growth, under Illinois' present tax structure, is a myth. Since 1979 state revenues have grown at a rate slower than inflation.

The strong growth so far this year in income and sales taxes offers an example. The sources account for about 60 percent of state general funds revenues, and so far this year other state receipts have fared as badly as the two largest sources have done well. For the first eight months of the year all other sources — led by a $40 million drop in lottery profits — were down $17 million. Correct for the effect of one-time and first-time receipts from the new tax on out-of-state telephone calls and compensate for $100 million borrowed last year, and revenue growth is down to $206 million or 2.97 percent. That is below an inflation level projected to increase by 4.8 percent. And these are good economic times.

On top of that, this year's surge in sales tax receipts is atypical. Since 1979 only the personal income tax and lottery receipts have grown faster than inflation. The Illinois Economic and Fiscal Commission, the General Assembly's bipartisan revenue forecasting unit, studied 17 years of general funds revenue patterns, adjusting receipts by the Implicit Price Deflator for State and Local Government Purchases of Goods and Services to measure real dollar changes. A draft report concluded that:

• Since 1979 the personal income tax has been Illinois' most stable general funds revenue source. It has accounted for 37 percent of general funds growth since fiscal 1979 and, with 8.4 percent growth in real dollars, has been the only tax source to exceed inflation.
• The lottery had been a steady growth source since it was created during fiscal year 1975. Between 1979 and 1987 its share of total revenues rose from 1 to 5 percent.
• Since 1979, corporate income tax receipts have been volatile. In 1987 the source accounted for 6 percent of general funds receipts, down from 7.6 percent in 1979. In real dollars corporate income tax receipts fell 25.2 percent over the period.

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• Since 1979, sales taxes have declined steadily in real dollars, except for fiscal years 1984 and 1985 when rate increases went into effect. Overall real dollar receipts are down 9.2 percent, and the sales tax has been displaced by the personal income tax as the general funds' top producer.
• Public utility taxes comprised an increasing share of general funds receipts until 1983. In real dollars, receipts from public utility taxes declined 18.2 percent between fiscal year 1979 and fiscal year 1987.
• Receipts from federal sources peaked at 22.6 percent of state revenues in 1973. Between fiscal years 1979 and 1987 the federal source revenues declined 22.2 percent in real dollars.
• Secondary sources (cigarette, liquor, inheritance, insurance taxes, etc.) have declined steadily.

The commission concluded that general funds revenue growth should be looked at in two periods. From fiscal year 1971 to fiscal year 1979, growth was strong in nominal and real dollars. Since 1979 it has been weak. "While in the first period general funds sources remained relatively stable with all the major sources contributing proportionately, after fiscal year 1979 general funds dependency for revenue growth shifted heavily to the personal income tax and lottery as most other sources experienced real dollar declines in receipts," the commission staff concluded.

In short, the personal income tax accounts for about 30 percent of general funds revenues, but strong growth in that piece of the Illinois tax structure has been unable to carry other sluggish sources. And the other growth revenue, lottery profits that are transferred to general funds, appears to have peaked. Lottery transfers stayed constant between fiscal years 1986 and 1987, are projected to drop in 1988, and to recover only slightly in the year beginning July 1.

But revenue is only half the state fiscal picture. On the other side of the ledger is spending. In theory, for the year that begins July 1, Gov. James R. Thompson should be in better shape than he was a year ago. He does not have to repay a $100 million loan, make up a budget deficit or rebuild his June 30 cash balance. Because of those factors, the $354 million in projected annual growth translated to almost $650 in new spending authority. It looked like good budget times.

Against that background on February 25 Thompson proposed a fiscal year 1989 budget that would spend $11.088 billion in the general funds and $22.21 billion in all funds. He proposed no tax increase, but he pledged to work for a "modest" income tax hike. Thompson would not define modest. In his budget, revenues would equal spending, and the state would begin and end the year with $200 million in the bank. (He would, however, spend $387 million from the fiscal 1989 appropriation in July, August and September of 1989, leaving his budget with a $187 million deficit under the budgetary balance concept.) And Thompson's budget is $139 million short of estimated need for corporate income tax refunds.

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Even without a tax increase Thompson has $643 million available for new spending. How does he manage to allocate that much money and provide none for schools and universities?

• The first $249 million goes to pay old bills. That is $159 million to pay bills that will be owed doctors, nursing homes and hospitals that served the poor. Another $65 million will be used to reduce what will be 76-day delays in paying those bills to 60 days, to avoid interest payments. Another $25 million would pay circuit breaker claims that 100,000 senior citizens filed for reimbursement of medicine purchases. (That leaves $394 million.)
• Thompson uses the next $72 million to give the courts and constitutional officers what they asked for. The Supreme Court gets the biggest slug, an increase of $36 million or 25 percent. Half the increase would go to add 102 positions and for salary increases. The balance would go toward program expansions including mandatory arbitration, pretrial services and probation efforts. Comptroller Roland W. Burris is after $8 million for his computerized accounting system, stalled by a Thompson veto last year. (That leaves $322 million.)
• The next drain on that balance is $87 million that Thompson says is unavoidable. Included is $25 million to fund the circuit breaker in fiscal 1989, $24 million to cover employees' health insurance cost and $38 million for income tax refunds. (That leaves $235 million.)
• Next comes another category of unavoidables, $113 million to pay mandated rate increases and the money to fund drugs for AIDS victims on public assistance. (That leaves $122 million.)
• Human services, specifically the Department of Mental Health and Developmental Disabilities, the Department of Children and Family Services, the Department of Rehabilitation Services and the Department on Aging — get $70 million. (That leaves $52 million.)
• Public Safety gets $43 million, with $31 million for corrections and $12 million for state police. (That leaves $9 million.)
• Everybody else splits that.

Who gets what? That is the eternal question of Illinois politics and will be the source of legislative debate this spring. Education, both elementary and secondary education and higher education, get nothing. As promised, Thompson funded both programs at fiscal year 1988 levels.

There is likewise no funding for the Comprehensive Health Insurance Program under which the state is to offer health insurance to the uninsurable and which could cost as much as $28 million next year. There is no money to increase welfare grants that have stood unchanged for three and a half years. There is no money for community providers of services to the mentally ill. There is no money to fund initiatives passed last year to help young retarded adults aging out of public school special education programs.

There is money for salary increases throughout most agencies, the largest portion

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going to fund the 5 percent salary hike negotiated by the American Federation of State, County and Muncipal Employees for its members. All told salary hikes will cost $67 million in the general funds and $91 million in all funds. There is money to reopen the Hardin County work camp in the Department of Corrections and another 197 beds in community settings. There is $576,600 in Lt. Gov. George Ryan's budget to pay for a Rural Affairs Council to help set rural policy.

Thompson outlined his spending plan on February 25 in a joint State of the State and Budget Message. For 32 minutes Thompson challenged lawmakers to hike taxes. He was not interrupted by applause. When Thompson was done he told them the budget was now theirs. "You may change it. You will change it. You always do. But you cannot say, in good conscience, that it adequately serves the real needs of the people of Illinois — now or for the future. It does not."

Predictably, legislative leaders were unathusiastic about the spending plan. Senate President Philip J. Rock (D-8, Oak Park), who said last year he would support a tax increase, continues that position, but says he is one of few who do. Senate Minority Leader James "Pate" Philip (R-23, Wood Dale) says there is virtually no chance of a tax hike. House Speaker Michael J. Madigan (D-30, Chicago) hit at Thompson's credibility, claiming none of the dire consequences predicted a year ago came true. "I didn't believe him then. I don't believe him now," Madigan said. House Minority Leader Lee A. Daniels (R-46. Elmhurst) said he heard no groundswell for a tax hike.

Although the leaders may have been noncommittal, the "tax eaters" were anything but. Those charged with responsibility for educating children and looking out for the poor, the mentally ill and the retarded, protested Thompson's budget as inadequate even before he released it.

The League of Women Voters of Illinois and the Chicago Urban League offered an "Alternative State of the State Report" three days before Thompson's own and called for a tax increase: "Today in Illinois we find that our children are not being adequately educated, that the homeless are appearing more and more on our streets, that abused children are neglected by an overburdened child welfare system and that too many pregnant women and their newborn infants are at risk."

Ted Sanders, state superintendent of education, led the criticism from the education community: "Enactment of the budget submitted by the governor would deliver a crippling blow to the ambitious school improvement effort started in 1985." Sanders argued that 40 other states spend more per capita on education than Illinois. "The plain fact is you can't maintain a first-rate education system with a second-rate financial commitment," he said.

All was predictable. Legislators are wary of raising taxes in an election year. Educators had been gearing up since July for a push this year. And into that debate came the Illinois State Chamber of Commerce. After Thompson unveiled his budget chamber president Lester W. Brann Jr. criticized the governor for not giving more to education and suggested the budget was a ploy to get educators to push a tax increase. "If the governor is intent in helping education find more money, he should have earmarked some of the anticipated growth in revenue and a larger portion of his budget for education," Brann charged.

That comment was predictable, too. Thompson had predicted it. In his budget address the governor said, "Still others contend that 'natural revenue growth' — ah, the old natural growth — in existing revenues can support higher increases with at least some new allocation for education. But the plain fact is that natural growth is not limitless." Thompson understated the point. At least since 1979 natural growth has not existed.

And what happens a year from now? Will the state at last be out of the woods and able to resume normal spending increases? It will not. Assuming no change in ending balances, lapse period spending or automatic transfers, a 4 percent general funds growth would allow something over $400 million in new spending for fiscal year 1989. Out of that must come money to pay $139 million in unpaid income tax refunds. The $275 to $300 million remaining is again less than inflation.

There is no natural revenue growth. A year ago lawmakers and the governor argued about unnatural revenue growth, a tax increase. This year they will again. Absence of natural growth foreordains the perennial debate. □

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