Democrat lawmakers push 75% state income tax increase

Personal rate would rise to 5.25% from 3% for 4 years

By Ray Long and Monique Garcia, Tribune reporters


SPRINGFIELD — — Gov. Pat Quinn and top Democratic lawmakers reached a tentative agreement Thursday on a major, post-election income-tax increase and a $1-a-pack cigarette-tax hike to stabilize the state budget and provide a cash infusion for schools.

The plan, detailed by Senate President John Cullerton following closed-door meetings with the governor and House Speaker Michael Madigan, still faces a review by rank-and-file members of the Democratic-led legislature in the waning days of a lame-duck session.

Under the proposal, the state's 3 percent personal income-tax rate would rise to 5.25 percent for four years, then fall to 3.75 percent. All told, that's a 75 percent increase.

The personal income-tax hike is expected to net the state roughly $6.2 billion, and a corresponding corporate income tax increase could raise an additional $1 billion, Cullerton said. The rate businesses pay would temporarily jump from 4.8 percent to 8.4 percent.

The cigarette tax increase, which is expected to raise $377 million, would go into what was described as a "lock box" to increase education funding. Lawmakers said they hoped to double that amount using other funds to provide more than $700 million in new school funding this spring.

To gain votes for the package, the plan also would provide $325 in property tax credits to homeowners this year and a direct check to taxpayers in subsequent years.

As a measure of how desperate state government's finances are, Cullerton said the state would use the income-tax hike to borrow $12.2 billion. Of that, $8.5 billion would pay overdue bills and $3.7 billion would cover a government worker pension payment lawmakers skipped when putting together the current budget, he said.

"I think it's the right time to do it because we are in desperate need of paying our bills," Cullerton said. "Just think about how we're going to be after we pass this. We would have all our bills, all those people that are owed money, $8 billion would go back into the economy. People will be paid on time. Our credit rating will be dramatically improved."

The proposal still could be changed slightly as lawmakers pore over the finer points, Cullerton added.

The first vote on the tax package will be in the House, but lawmakers were left guessing whether the legislation would be ready to consider by Friday or, failing that, when they return Sunday.

"I think it will pass the Senate, but it has to pass the House first," Cullerton said.

Madigan declined comment, but spokesman Steve Brown said "things are progressing, but I'm not prepared to offer any details at this time, and I certainly wouldn't predict when there might be a vote."

Quinn is to be sworn in to a four-year term Monday, two days before the legislative session ends and the reset button is hit as the new General Assembly is seated. The Senate returns Monday, and could send Quinn the tax hike only hours after he takes the oath of office, leaving him largely in a take-it-or-leave-it position.

Almost from the day he took over from the ousted Rod Blagojevich in early 2009, Quinn has called for an income tax increase to right the state's books. He campaigned on the proposal that the state should raise the personal income tax to 4 percent from 3 percent. Though Quinn won with only 47 percent of the vote, he declared his victory a "mandate" to raise taxes.

Last summer, Quinn's budget director predicted in an interview that Illinois would raise the state income tax rate from 3 percent to 5 percent in early January. The governor admonished the aide for speaking out of turn and suggested David Vaught's comments were misunderstood by an out-of-state reporter.

Now lawmakers are considering a tax hike that's even higher.

Senate Republican leader Christine Radogno of Lemont called it "dishonest" for Quinn to consider an income tax hike that's more than twice as much as he embraced during the campaign.

"To me, that's kind of a bait and switch, and I think it's wrong, and it's wrong to do it in a lame-duck session," Radogno said.

Quinn released a statement saying he's working with Cullerton and Madigan to "build framework that will allow the state to pay its bills, stabilize the budget and strengthen the Illinois economy."

Major details began falling into place this week after members of the Black Caucus, particularly in the Senate, rejected the notion of raising an income tax without guaranteeing new money for schools and property tax relief for homeowners.

In May 2009, the Senate approved legislation to raise the income tax to 5 percent, extend the sales tax to some services, provide property tax relief, give targeted tax breaks to the poor and pump up money for education. The legislation was championed by Cullerton and Sen. James T. Meeks, D-Chicago. But Meeks, fellow African-Americans and Latino senators balked when high-level talks this time failed to include those items.

The move by Democrats in the closing days of the post-election session reflects a dramatic final effort to deal with a state budget reeling from years of overspending, the compounded effects of the recession on unemployment and tax revenue, and massive borrowing to cover the need for a tax increase.

With Illinois' financial problems escalating each budget year, the state is facing prospects of a $15 billion budget deficit and more than $8 billion in overdue bills to providers of social services, primarily to the poor. At the same time, its massively underfunded public employee pension system faces the prospect of selling off assets to help cover retirement payments.

Though Democratic leaders, particularly Madigan, maintained the need to get the votes from minority Republican lawmakers to pass a tax hike, it is questionable that the size of the increase — despite a significant portion being designated as temporary — will win many GOP votes.

In a move aimed at winning over some Republican support, the House sent Medicaid reforms to the governor. Medicaid applicants would be required to prove Illinois residency as well as show one month's income before they could sign up. Recipients would no longer be automatically re-enrolled, and those abusing the system could face a $2,000 fine.

Income limits would also be put in place for the All Kids health insurance program. To qualify, applicants would have to have an annual income at or below 300 percent of the federal poverty level, or $66,150 for a family of four.

Also in the House, lawmakers defeated a second attempt to allow marijuana to be used for medical purposes. The bill fell four votes short.

Tribune reporter Rick Pearson contributed from Chicago.

rlong@tribune.com

mcgarcia@tribune.com

http://www.chicagotribune.com/news/local/ct-met-illinois-tax-hike-0107-20110107,0,6270739,full.story