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State income tax a study in expediency

Gov. Pat Quinn sought to make the 5 percent income tax rate permanent in his budget address last week.

The Illinois income tax, conceived in the 1960s as a Republican-led initiative, has now become a complex problem vexing the Democrats who control the Springfield of today.

That has played out vividly in recent days as Gov. Pat Quinn and House Speaker Michael Madigan embarked on a politically tricky balancing act of persuading voters in an election year that they must forgo a broad tax cut or face massive spending cuts.

And that's the thing about the income tax system that forms the bedrock of government finance in a state widely considered a fiscal basket case. It is rooted less in partisan stereotypes than political expediency, and its haphazard evolution over the years has only left Illinois lurching from financial crisis to crisis.

Quinn used his annual budget address last week to ask lawmakers to make permanent a tax rate increase to 5 percent that they approved on a temporary basis three years ago. He also wants to soften the blow with a property tax rebate for most middle-income homeowners and a bigger tax credit for low-wage earners.

Madigan, who is arguably the most powerful political force in the state, advanced his separate but complementary plan in the House for a proposed constitutional amendment that would ask voters to approve a so-called millionaire's tax requiring a 3 percent tax surcharge on incomes exceeding $1 million a year. In addition, Madigan has floated another plan to chop the 7 percent corporate tax rate in half, making it lower than the rate for individuals.

But Bruce Rauner, Quinn's newly minted Republican challenger in the November governor's race, cast both Democratic proposals as wrongheaded in a state that he argues needs lower taxes and government spending cuts to stimulate job growth and help the economy flourish. At the same time, however, Rauner has steered clear of specifics about how he would accomplish that.

The bottom line is that all sides are continuing a long Illinois tradition of attempting to tinker with the tax system in a way that critics contend is outdated, not comprehensive and in the end self-defeating.

"A serious financial crisis requires serious solutions, not gimmicks and gotchas," said Laurence Msall, president of the Civic Federation, a budget policy watchdog group. "All of this gimmickry reinforces a message that in the state of Illinois, you can't tell what they are going to do next. It creates uncertainty."

Separating politics from policymaking, especially at election time, is always a challenge.

Underlying the emerging theme of the battle between Quinn and Rauner is that 5 percent tax rate for individuals, which was raised from 3 percent in 2011 in what Quinn sold at the time as a temporary hike to help the state pay down a huge backlog of unpaid bills. The rate is scheduled to drop to 3.75 percent next year unless the legislature intervenes, as the governor is now asking it to do.

Quinn argues that the higher rate should be made permanent lest the state see an immediate $4 billion-a-year drop in revenue that would starve it of money to fund schools and other vital services, forcing new pressure to raise local real estate taxes even more unpopular than the income tax.

Rauner and fellow Republicans were quick to lash out at Quinn's proposal as a broken promise to taxpayers. Left unsaid in that argument, however, is that former Republican Gov. Jim Thompson pushed through a temporary income tax hike that his GOP successor, Jim Edgar, later made permanent.

If Illinois governance were reduced to a game of tag, then Democrats would clearly be "it." But over most of the 40-plus-year life span of the Illinois income tax, it has been Republicans in charge of the executive mansion, leaving a problematic tax policy legacy that is truly bipartisan in nature.

Illinois voters might be comforted to know that former Republican Gov. Richard Ogilvie unveiled his plans for the state's first income tax in a speech delivered on April Fools' Day in 1969.

What's more, Ogilvie initially hoped to set the new levy for individual taxpayers at 4 percent, far higher than they ended up paying until recently. The compromise 2.5 percent rate got the green light from the Illinois Supreme Court, with then Republican Justice Byron House delivering an opinion that declared it a tax on the "privilege" of earning wages in Illinois.

As the Ogilvie administration adopted the income tax, it decided to exempt retirement income such as Social Security and pension benefits. The federal government and most states tax retirement income, but Illinois' decision to forgo it costs the state as much as $2 billion annually in revenue, according to budget experts. That's about half of the amount Quinn says the state would lose if the temporary income tax increase was allowed to lapse.

But Quinn is adamantly opposed to any revision arguing that it would be tantamount to trying to "balance our budget on the backs of our senior citizens." No voting bloc turns out at the polls more reliably than seniors.

Yet Quinn's rationale for keeping the break is a far cry from the largely technical reason it was enacted in the first place. Illinois officials in the early 1970s were faced with a difficult problem of trying to distinguish between tax treatment of pension benefits earned before the income tax went into effect and those earned afterward. Their solution, according to research by the National Tax Journal, was to throw up their hands and not tax any retirement income.

In his budget message, Quinn sought to soften the blow of keeping the 5 percent income tax rate with a plan aimed at revamping property tax relief programs enacted years ago under Republican governors. Quinn now wants to give every homeowner in the state a property tax rebate of $500. For most homeowners, Quinn's plan would be an improvement over the value of the old GOP-inspired relief program, but it would come at a steep price to the state treasury and still offer no benefit to renters, whose ranks have grown significantly since the recession.

Another Quinn proposal involves a costly expansion of a tax credit program for low-income wage earners with children enacted in 2000 under Republican Gov. George Ryan. A year earlier, Ryan sought to placate his conservative base by adding a tax credit to help offset the cost of sending children to private schools, chipping tens of millions of dollars from receipts that otherwise would flow into state coffers.

bsecter@tribune.com

rap30@aol.com

Copyright © 2014, The Baltimore Sun
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