The tax increases of 1989: structurally similar to 1983 but politically opposite

It was a different kind of spring in the Illinois General Assembly as far as taxes are concerned. For the third consecutive spring debate swirled around in income tax increase; this year there was more than talk. When lawmakers adjourned on July 1 they had boosted income, gasoline and cigarette taxes along with several smaller taxes and fees.

Most everyone's attention with the spring session was on the machinations to pass the major taxes. The increases in income, gasoline, cigarette, computer software and real estate transfer taxes will generate an estimated $1.1 billion in new revenue in the year that began July 1, 1989. When fully implemented in the year beginning July 1, 1990, they will raise an estimated $1.3 billion in new revenues. Drawing less attention were other taxes and fees that lawmakers hiked on home heating fuel, coin-operated amusement devices and telephone service. Lawmakers also gave some schools and local governments authority to hike property taxes.

For Douglas L. Whitley, president of the Taxpayers' Federation of Illinois, the spring session marked a return to form by lawmakers, who had constrained new spending in the two previous years. The passage of the income tax increase did not surprise Whitley, nor the gasoline tax. He says that the income tax increase was inevitable after Speaker Michael J. Madigan (D-30, Chicago) dropped his opposition in mid-May. And, because Illinois relies on stagnant gasoline sales as the base for its gasoline tax, an infusion of new money every five to seven years via tax increase is expected.

It was on what Whitley calls the debatable need for higher cigarette, computer software and real estate transfer taxes that he saw attitudes change: "To me that said the Illinois General Assembly has backed away from the fiscal restraint, the self-imposed restriction, on spending." He questions, for example, whether state funds — which lawmakers decided to raise with a new tax on computer software — should be used for bonds to build local civic centers. "It's the spending side, it's the General Assembly's appetite for spending and its apparent denial of any restraint that I find most worrisome," Whitley said. He calls the rash of bond-funded capital projects the "grandson of Build Illinois."

With the gasoline tax, the taxpayers' federation president noted some positives and some negatives. He is pleased to see mass transit supported, and the commitment to use most of the money for improving the existing highway system instead of expanding it. On the other hand, Whitley criticizes the local option gasoline tax authority given to DuPage, Kane and McHenry counties, believing that the patchwork of local taxes will further erode Illinois' ability to develop a state policy.

In the process of hiking taxes and spending, Whitley says lawmakers sidestepped the two most significant public policy questions in Illinois — property tax relief and school finance. He understands why: Dealing with the $7.2 billion property tax levy that schools and local governments annually collect from property owners is enormously expensive. So is changing the basis of school finance to move away from the inequities of the local property tax. "It's a lot easier for them to do what they did this year, which was raise taxes and spend money," Whitley says.

As Whitley noted, passage of an income tax increase became a real possibility on May 17 when Speaker Madigan — for two years the principal nay sayer on the issue — reversed himself and proposed and passed in the House his own tax increase plan, H.B. 490. Madigan's two-year surcharge would have boosted personal and corporate income tax rates by 18.4 percent, raising $726 million after refunds. Higher and lower education would have gotten half the money and local governments the other half. The new money would have given Chicago, which faced a $120 million budget deficit, $94 million in new funds. For the Pike County village of Time, population 27, it meant $845.18. Every city and county would get its share, based on population.

The Madigan tax increase set the framework, and the subsequent proposals would be modifications of his plan. All knew that it would be more difficult to pass the measure in the Senate, where Senate President Philip J. Rock (D-8, Oak Park) enjoyed neither Madigan's 16-vote majority nor his element of surprise. The only formal hearing on an income tax increase came on May 30 in the Senate Revenue Committee. Rock said those who had alternatives should come forward with them on their own bills, but he warned that tinkering with H.B. 490 could

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Madigan

kill the tax hike: "For whatever reason, for whatever motivation, the fact is that it has met with majority approval in the House of Representatives and is now before us." Educators and local government officials argued for it. Republicans tagged the measure a "Chicago bailout" and unsuccessfully sought to amend it to require local governments to use all their new money for property tax relief. On a 7 to 5 party line vote the bill was passed to the full Senate.

No alternatives appeared. On June 14, H.B. 490 came up for second reading in the Senate where Republicans sought to amend the measure. Rock fought all amendments, suggesting that amendments were designed to kill the measure and urging legislators to keep the bill "pristine." He successfully fended off seven amendments, one Democratic and six Republican. Republicans sought to trim the increase, provide property tax relief and to give more money to schools. The closest they came to passage was on amendment number five, offered by Sen. Cal Schuneman (R-37, Prophetstown) that would have given half the tax proceeds to education, one quarter to local governments and one quarter to various state programs. The amendment drew 26 votes, including those of three Democrats. But Schuneman lost five Republican votes, leaving him four votes short of success.

All acknowledged that Rock faced an easier task in keeping his bill clean than in rounding up the votes for passage. Rock admitted that on June 14 he lacked the votes to pass the measure and said he would work on his members and welcome Republican support. Senate Minority Leader James "Pate" Philip (R-23, Wood Dale) predicted that H.B. 490 would draw no Republican votes whenever it was called.

Rock let the measure sit until June 23, the last day for Senate action on House bills. Rock said he was confident. Equally confident was Philip. Debate began just after 4 p.m. Rock reiterated his theme that there would be no other serious proposals: "We can say once again that Illinois is doing the best that it can." Republicans disagreed. Sen. Jack Schafer (R-32, Cary) questioned the funds for local government. "We came down here thinking this was a year of crisis for education and found out it was a year of salvation for local governments," Schaffer said. Others protested the "take it or leave it" nature of the proposal. "It seems like we have become a wholly owned subsidiary of the Illinois House of Representatives," Sen. Bob Kustra (R-28, Park Ridge) charged. When the vote came, it was not even close as several members of the black caucus stayed off the measure. Only 21 senators, all Democrats, voted "yes." Rock put the matter on postponed consideration and worked on his members for the next couple of hours. House Speaker Madigan in the meantime met with members of the black caucus. At 8:30 the Senate again took up H.B.

It increased the rate increase from 18.4 to 20 percent, raising the individual rate from 2.5 percent to 3 percent and the corporate rate from 4 percent to 4.8 percent

490. Sen. Earlean Collins (D-9, Chicago) said that Madigan had assured black caucus members that he would work in two years to assure the financial stability of the Chicago public schools, their biggest concern. Republicans continued to protest. "This is legislative blackmail of the highest order," Kustra charged.

Rock again fell short. With four Democratic defectors the measure went down by a 27 to 29 margin. Rock said after the vote that the failure was a personal defeat for him. Thompson came over to Rock's desk afterwards and asked for further talks. Rock said he wanted to see something in writing.

Thompson proceeded to try and negotiate the tax rate upwards, raising it to a 30 percent rate increase, and includiqg a property tax relief component. He enlisted little Democratic support and was unable to convince Republicans to back a tax rate higher than the Democrat plan. Philip tried to come up will a plan acceptable to his caucus. His modification of the original Madigan proposal was a 20 percent permanent tax increase that would have distributed the same amount of money to schools, given less to local governments and allowed homeowners to deduct 10 percent of their property taxes on their income tax return. The Republican caucus decided against formally proposing the plan and instead asked Rock to call H.B. 490 again so the bill could be put to rest.

But Republicans would have to fight a new enemy: H.B. 490 would not be resurrected. On June 29 Rock and Madigan unveiled a new tax increase plan, one that provided "property tax relief" designed to bring dissident Democratic senators onto the plan. The revised plan remained temporary. It increased the rate increase from 18.4 to 20 percent, raising the individual rate from 2.5 percent to 3 percent and the corporate rate from 4 percent to 4.8 percent. The higher rates generated $135 million more than H.B. 490. The property tax relief component allowed homeowners to deduct twice their property taxes from their income tax, but it would trim the yield by $178 million. That $43 million difference between what the higher tax raised in revenue and the cost for the new deduction came out of the local governments' share of the tax increase.

Rock said the proposal came after Republicans failed to come up with an alternative. Madigan said the property tax relief was designed to answer objections to H.B. 490. "Its inclusion means that anyone who continues to oppose this legislation is merely an obstructionist who is out to punish the school children of Illinois for the sake of some perceived political gain," Madigan said. Nearly identical charges had been leveled at Madigan for two years.

The revised income tax increase was put on the conference committee report for S.B. 169. It came up for a vote in the House first where Republicans attacked it as excessive and a

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Chicago bailout. His microphone adorned with a bumper sticker that read "No New Illinois Taxes," Rep. Bernie Pedersen (R-54, Palatine) charged, "This is a pigout of monumental proportions." Half a dozen Republicans voted for the "pigout."

The real test would come in the Senate. Again Republican support proved elusive. "I don't want to leave Springfield today telling education we're going to give you a bandaid for two years," Sen. John Maitland (R-44, Bloomington) argued. Other senators complained that the measure did not mean true property tax relief and that cities and counties were the big winners. Rock again argued that the opportunity could not be missed: "We have a real political opportunity that if not taken will not return." The compromise drew two Democrats who had voted against H.B. 490 and one Republican, Sen. Ralph Dunn (R-58, DuQuoin). It passed 30 to 27.

Although passage of the income tax was not directly linked to other taxes, the successful vote opened the door. Passage of the Department of Transportation's gasoline tax followed soon after. Lawmakers amended the department's original request for a 6-cent a gallon increase to require it be phased in, although barely so. As signed by Thompson, motor fuel taxes rose 3 cents a gallon on August 1 and will rise another 3 cents on January 1. Over the next five years the average yield from the new tax will be $309 million, of which the state will receive 75 percent and local governments 25 percent. The state, however, will use about $25 million a year of its share for local programs, leaving the state/local take at 67.5 percent/32.5 percent.

The gasoline tax bill also gave three counties authority to impose local gasoline taxes of up to 4 cents per gallon. DuPage, which had pushed for the local tax, and neighboring Kane and McHenry counties can by local ordinance impose the tax which will be collected by the state for them. Lawmakers from Lake and Will counties struck provisions that would have allowed their counties to impose local gasoline taxes.

That same bill also created a new state obligation bond fund to pay for $500 million in Regional Transportation Authority capital improvements. The five-year plan for spending the money must be submitted to the General Assembly and approved by the governor. The $50 million a year to pay off the bonds will come out of sales tax money that had previously gone to the Road Fund. The Road Fund's loss, in turn, is made up by capping Road Fund spending by the secretary of state (at fiscal year 1992 levels) and the State Police (at fiscal year 1990 levels). That complicated maneuver does two things. It makes the State Police and secretary of state compete for general funds money, and to the extent they are successful, it reduces the general funds money available for other programs.

The other big tax increase, and the only one that will pump substantial new money into the general funds, is the cigarette tax. Gov. Thompson had sought an 18-cent increase, boosting the per pack tax from 20 cents to 38 cents. In the closing minutes of the session, bowing to appeals from Thompson who said that without that new money, spending cuts would have to be made, lawmakers approved a 10-cent per pack increase. The increase will generate about $90 million per year. Other tax and fee increases approved by lawmakers included:

Philip

• Computer software. Legislators brought Illinois into line with every other state in the nation by imposing the sales tax on canned computer software. The inclusion will add $27 million in new revenues annually, money that will be used to pay the debt service on new civic centers, state park expansion and other capital projects for which bonds are sold.
• Real estate transfer tax. Legislators doubled, from 25 cents to 50 cents per $500 of sale price, the tax on transferring property. Half the money, about $13 million annually, will be diverted to the Illinois Affordable Housing Trust Fund to build and renovate low-income housing.
• Leaking underground storage tank tax. Legislators imposed, effective January 1, a .3 cent per gallon tax on motor fuel, aviation fuel, home heating oil and kerosene. The estimated $25 million that the tax will raise annually will be used to clean up leaking underground tanks.
• School property taxes. Legislators boosted, over a four-year period, tax rates that downstate unit school districts can levy for operations, building and maintenance fund, from .375 percent to .50 percent. The move allows unit districts (kindergarten-12th grade) to levy the same taxes as could separate elementary and high school districts. The authority could eventually increase property taxes by $25 million.
• Community college property tax rates. Legislators approved a measure that allows community colleges with tax rates below the statewide average to petition the Illinois Community College Board to approve higher rates.
• Video game tax. Legislators approved an increase from $10 to $25 in the annual privilege tax on coin-operated amusement devices.
• 9-1-1" surcharges. Legislators permitted without referendum in Chicago a $1.25 per subscriber monthly surcharge to fund emergency telephone systems.
• Motor vehicle fees. Legislators raised the cost of obtaining a title from $3 to $5, with the money to be used for new bicycle paths.
• Duck stamps. The cost was doubled to $10 per stamp, providing $300,000 annually for waterfowl projects.

Looking at the entire package, the Taxpayers' Federation's Whitley sees similarities to the 1983 tax increase. The result was almost identical: a temporary half percent increase, except that the 1983 hike was for 18 months and the 1989 boost for 24 months; a gasoline tax hike; and a permanent general funds tax increase (the 1983 increase was in the general sales tax rate, while the 1989 increase boosted cigarette taxes).

There were marked political differences. In 1983 House Minority Leader Lee A. Daniels (R-46, Elmhurst) had come up with the temporary scheme, and Senate Republicans had concocted the property tax deduction. This time the tax measure was almost exclusively Democratic. "With the exception of Thompson, there was no Republican fingerprint on it," Whitley observes.

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