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Thompson's no-income-tax-hike budget: Precursor to another campaign?

Gov. James R. Thompson spent the last two springs explaining why there was little or no new money to spend and arguing that as a result taxes must be increased. This year Thompson has changed that tune. The governor dropped his strident calls for an income tax increase and proposed instead a cigarette tax hike. And he has offered Illinois citizens a budget with an increase of more than $800 million in general funds spending for the next fiscal year.

The governor's proposed budget for fiscal year 1990 (the year that runs from July 1, 1989, to June 30, 1990) poses three questions. First. Where did the money come from? Second. Does $800 million in new spending foreclose an income tax increase? Third. Is Gov. Thompson setting himself up for another reelection campaign? The answer to the first question is that state revenue growth reflects Illinois' belated economic recovery, the payment of some old bills in 1989 and the decision not to pay others in 1990, and the money to be raised by new tobacco taxes. The answer to the second is: probably. Only Thompson knows the answer to the third, but his 1990 spending plan closes no doors.

The governor's budget included hefty increases for education and for human services, along with funding for initiatives he outlined in his State of the State Message to fight drug and alcohol abuse and to bolster business development. Thompson told lawmakers March 1 that his proposed budget did not meet all needs but was far better than any in recent years: "It does bring welcomed improvements that will be seen and felt throughout the state." In his budget message he touted the $345 million increase in education spending and the $200 million to be shared by six social service departments. He praised his plan: "Viewed in the context of what can be done with present resources and cigarette tax revenues, this budget does great things." The governor sure sounded like a candidate.

Before looking at where the money came from, a word of caution is in order. Because of accounting changes, fiscal years 1988, 1989 and 1990 are not comparable. Until a couple of months ago the state had received all income tax withholdings and payments into the general funds and counted them as general funds revenue. When it came time to pay income tax refunds to individuals and businesses, the state estimated the liability and appropriated the money and spent it from the general funds. That has changed.

In the midst of the fiscal 1988 budget crunch, income tax refunds were among the state obligations that got held up. Tax payers got mad, and lawmakers reacted by creating a tax refund fund. Paid into it are 6 percent of individual income tax receipts and 18 percent of corporate income tax payments. When it comes time to pay the refunds, the money comes from that already set aside. The new fund was created effective January 1, 1989, in the middle of the current (1989) fiscal year. The net result is that fiscal 1988 was handled the old way, fiscal 1989 half under the new and half under the old, and fiscal 1990 under the new method. Unless the refund fund is taken into account, revenues, appropriations, and spending from the general funds appear depressed.

On the revenue side, making adjustments for the refund fund by pretending for a moment that it does not exist, the state has benefitted from natural revenue growth of $507 million, or 4.2 percent. (If onetime revenue boosts of $59 million from release of protested insurance and telephone taxes are ignored, the base growth was $566 million, or 4.7 percent.) The pattern is the standard one of recent years with decent growth in income and sales taxes but other revenues virtually stagnant. Projected increases include: individual income tax collections up $201 million or 5.5 percent, corporate income tax collections up $71 million or 9.7 percent, sales taxes up $184 million or 5.0 percent, and other state sources up $24 million or 1.0 percent. The overall general funds revenue growth of 4.2 percent trails the projected inflation rate of 4.9 percent.

The natural revenue growth of $507 million would have occurred had not the refund fund been created. But the refund fund is real, and a substantial portion — $237 million -- of the "natural growth" will end up in the refund fund instead of the general funds. For fiscal year 1990 the increase over that diverted to the refund fund in fiscal 1989 breaks down as follows: $128 million in individual income tax receipts. $72 million in corporate receipts and $37 million in corporate personal property replacement tax payments. That leaves $270 million of the $507 million in natural revenue growth available for general funds spending.

In the two previous budgets the natural revenue growth had been eroded by the need to rebuild the state's bank balances and to pay bills that were owed taxpayers, doctors and hospitals. This year the opposite occurs because having done that once, Illinois need not repeat in fiscal year 1990 the $150 million spent to pay bills. Included in that figure are the $90 million used in fiscal 1989 to catch up on bills owed for medical services provided to the poor and another $60 million that in 1989 repaid money borrowed to bolster the unemployment fund

April 1989 | Illinois Issues | 12

Alpha to Omega:
How $507 million in general funds natural revenue growth allows $816 million in effective new spending for fiscal year 1990
(in millions)

$507 Alpha. Natural Revenue Growth (excluding refund fund)
      MINUS growth that goes to refund fund:
-128 a. individual income tax
-72   b. corporate income tax
-37   c. corporate personal property replacement tax

$270 X. natural growth adjusted for money going to refund fund

      PLUS 1989 spending which is nonrecurring in 1990:
+90   1. shortening of Medicaid cycle
+20   2. final payment of federal loan for unemployment fund
+33   3. circuit breaker payment catch-up
+7     4. various agencies
+221 5. 1989 refund spending from general funds

$641 Y. adjusted natural growth plus one-time 1989 spending

+l70 6. new tax on cigarettes and tobacco products

$811 Z. adjusted natural growth plus tax increase

+ 5   7. 1989 "surplus"

$816 Omega. Effective New Spending in Fiscal 1990

Source: Bureau of the Budget.

and to catch up with circuit breaker payments. Also not repeated is $221 million spent in fiscal 1989 from the general funds for income tax refunds. In effect, $371 million has been freed up in the general revenue funds for new spending in fiscal 1990. Add that to the $270 million available from natural revenue growth and there is $641 million more to spend in fiscal 1990 than in 1989 — without any tax hike.

Thompson's proposed tax on cigarettes and tobacco would produce $170 million in new fiscal year 1990 revenue. The tax on cigarettes is projected to yield $170 million in 1990, and the tax on cigars, chewing tobacco, snuff and pipe tobacco another $10 million. Thompson's budget, however, projects an extra $10 million in cigarette tax stamp sales this year as distributors scrurry to buy less expensive stamps in June. As a result the growth, the increase from this to the next fiscal year, would be $170 million, and when added to the $641 million, yields $811 million in general funds available for new spending.

The final detail to explain how $507 million in natural revenue growth allows new "effective spending" of $816 million is the surplus. Illinois revenues will exceed spending by a modest $5 million in 1989, while the two sides of the ledger are projected to match perfectly in 1990. That surplus, added to the revenue side of the fiscal 1990 budget, pushes up the total available for new spending to $816 million.

Thompson also got to $816 million in new general funds spending by choosing not to pay some "old bills." The Department of Revenue estimates that there will be $100 million in corporate income tax refunds owed on June 30, 1990, when the state closes the books on fiscal year 1990. Robert L. Mandeville, director of the governor's Bureau of the Budget, says that there may be money available to reduce the amount somewhat during fiscal year 1990.

A second area where the administration could pay old bills is in its pension funding. The budget proposes to continue to pay 44 percent of payout into public employee pension systems. Last summer Thompson had amendatorily vetoed (to delay the effective date until fiscal 1990) a bill that would have shifted the base for the state contributions from the amount of benefits being paid to payroll. The House balked in a dispute over the amendatory veto, and the bill died. To have proposed the same change in the fiscal 1990 budget would have cost $130 million. Budget chief Mandeville said the judgment was made that the systems are already healthy and that the money could be better used elsewhere.

On the spending side of his budget, Thompson characterized it as a major step forward for education and human services: "This is the first decent budget in several years." In terms of dollars, education was the biggest winner with an increase of $345 million in state funds. Elementary and secondary education saw a $206 million increase in general funds support. The healthy jump, however, is the first in three years. State funding was cut in 1988 and then restored in 1989 to 1987 levels. The total increase over the period 1987 to 1990 is $215 million, all but $9 million of it coming this year. The same pattern holds for higher education, whose $139 million increase in 1990 is the largest part of a $155 million increase over the three-year period.

Human services came in for substantial new money, particularly when compared with two previous bleak years. A hunk of the new spending is committed to meeting federal requirements that the mentally ill and retarded not be warehoused in nursing homes. The federal government's Omnibus Budget Reconciliation Act (OBRA) requires prescreening of everyone admitted to nursing homes beginning January 1, 1989, to insure only those who need medical care are admitted. By April 1, 1990, all current residents must be assessed and persons inappropriately placed must be moved. It is estimated that 3,000 developmentally disabled persons and 9,000 mentally ill are inappropriately placed in Illinois nursing homes.

To meet these federal demands the governor's budget proposes to spend $87.4 million in fiscal 1990. Nearly $57 million would be spent to convert nursing homes now serving large populations of the mentally ill into rehabilitation facilities. Another $21 million would fund residential support for persons ineligible for nursing home admissions. Federal penalties for failure to comply are not dilineated but could extend to disapproval of all federal Medicaid reimbursement.

Other human service spending increases go to the departments of:

  • Children and Family Services: a $29 million increase that will fund efforts to offer treatment to families instead of removing the children, new efforts to recruit foster parents, more hotline abuse operators and investigators and caseload increases. There is no increase in day care slots.

April 1989 | Illinois Issues | 13

  • Alcoholism and Substance Abuse: a $24 million increase including a $4.25 million program for education, prevention and research and $17 million to residential and nonresidential treatment programs.
  • Public Aid: a $17 million increase, that appears lower than it is because of onetime catch-up payments in fiscal 1989 and transfer of OBRA-related responsibilities to the Department of Mental Health and Developmental Disabilities. State spending for income support (welfare checks) is projected to decrease because of a declining caseload and no grant level increase.
  • Insurance: a $7 million increase to pay for a full year of the Comprehensive Health Insurance Program that provides state-subsidized health insurance to the uninsurable.
    Other substantial increases go to the departments of:
  • Corrections: a $52 million increase to fully operate the Western Illinois Correctional Center in Mount Sterling and the Illinois River Correctional Center at Canton and to add 533 beds to other facilities. No funding was included for a third prison, and Corrections Director Michael Lane warned that the system remains dangerously overcrowded.
  • State Police: a $33 million increase that would create five new Metropolitan Enforcement Groups to fight drugs as part of Thompson's expansion of his war on drugs.
  • Commerce and Community Affairs: a $33.1 million increase, including Thompson's $20 million challenge grant program to leverage federal and private research dollars for state universities and his $10 million technology investment fund to provide loans to firms seeking to upgrade their technology. There is money to open an overseas office in Moscow.

The budget does and does not include a few more things of note, many of which are likely to be the subject of scrutiny by legislative appropriations committees and staff. Thompson proposed no increase in grant levels for those on welfare who have seen no increase in their checks for more than four years, but lawmakers indicated that finding some money for those people would be a priority. There were also calls to find more money in the budget for a larger increase for education, particularly to boost funding for preschoolers judged at risk of failure and in need of extra attention.

The budget does include a 5 percent increase in rates paid by the state to hospitals, nursing homes and community agencies that provide service under contract. And there is money to pay for the first year of the new contract settlement with the American Federation of State, County and Municipal Employees. Costs of the 3.5 percent salary increase and improvements in health and life insurance are about $55 million in the first year of the contract. The settlement has been judged reasonable by House Democrats, who monitored the negotiations after being denied a seat at the actual talks.

Thompson's budget also includes an expansion of the sometimes controversial Build Illinois program to fund his $320 million Science and Technology Initiative. Money would be divided between capital improvements at public colleges and universities ($250 million) and specific allocations for laboratories at both the Chicago and Urbana-Champaign campuses of the University of Illinois (almost $70 million). Bond payments would be made by increasing the diversion from general funds of sales tax receipts from 2.2 to 3.0 percent. That would generate $32 million to pay bonds in fiscal 1990. It also removes $32 million from general funds revenue.

Legislative response to the budget was predictable. House Speaker Michael J. Madigan (D-30, Chicago) said it vindicated his two-year opposition to a tax increase, but he continued to criticize Thompson: "This is a governor who would propose a tax a day if he could do it." At the same time, Thompson's biggest tax hike supporter, Senate President Philip J. Rock (D-8, Oak Park) said that Thompson appeared to have given up: "I'm a little suprised the governor has thrown in the towel this early and said that this is the bottom line within which we are going to live."

The nonproposal of an income tax relieved Republicans caught between the pressure brought by their governor to support a tax increase and Madigan's refusal to budge. Senate Minority Leader James "Pate" Philip (R-23, Wood Dale) said he was happy with increases given education and social services without an income tax increase and praised Thompson for doing more with less. House Minority Leader Lee A. Daniels (R-46, Elmhurst) said the budget maintained essential services: "It makes the most of our limited resources, while it should relieve the pressure on local school districts to increase property taxes."

However, Philip and Daniels both saw problems with decreased highway funding. And Thompson himself, while calling the rest of the budget "good" or "great," characterized highway spending as "woefully inadequate." The governor's budget calls for road program spending to decline from $901 million in fiscal year 1989 to $885 million in fiscal year 1990. Thompson said he did not propose a gasoline tax increase because he feared that lawmakers would be assailed by human service groups claiming that they were putting concrete ahead of people. "I think people need to see what they can't have without one [gasoline tax increase], first," Thompson said, leaving open the option of proposing one later.

Thompson can continue to ponder a gasoline tax hike, but $816 million in new spending dooms an income tax increase in the eyes of most. Rep. Jeff Mays (R-96, Quincy), GOP spokesman on the Appropriations I Committee, says that some will push the increase and that anything could happen. "It's possible. It's not likely. And it's probably not wise," Mays says.

One of Mays' across-the-aisle counterparts, Rep. Woody Bowman (D-4, Evanston), chair of the Appropriations II Committee, believes Thomspon's budget leaves the question of a state income tax hike murky. Bowman contends that higher cigarette taxes will dampen consumption and leave too little revenue to support Thompson's initiatives: "This is not a budget for the future in terms of putting the state on a sound financial. basis. It might be a budget for the next election."

Whether Thompson will run again remains a real question. Bowman sees signs of another campaign in the new initiatives and the absence of a call for an income tax increase. Mays says only that Thompson has proposed a spending plan that he can defend anywhere: "I don't think he's precluded anything."

Thompson himself is not saying. He was asked at the end of his February 28 budget briefing whether this was his next to last budget. "My next to last budget? In this term. Yes."

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