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Local Editorials

Get a better handle on state finances

With the state’s temporary income tax hike about to roll back, the incoming Rauner administration must get a better handle on the state’s financial situation and take intelligent action to improve it.

Come Jan. 1, Illinois residents who pay income taxes will receive the promised reduction in the temporary 5 percent rate that they have paid the past 4 years.

The income tax rate will decline to 3.75 percent, which will mean more money in taxpayers’ pockets, even as it means less revenue for state coffers.

Gov. Pat Quinn, who signed the temporary tax hike into law in January 2011 after its approval in a lame-duck legislative session, announced earlier this year that he wanted to make the new rate permanent. His defeat in the November election derailed those plans.

We’ve heard it described that the rate increase from 3 percent to 5 percent, effective the past 4 years, was equivalent to each taxpayer paying the state an extra week’s wages a year.

The reduction to 3.75 percent is akin to getting the wages of 3 of those days back.

Another way of putting it is that a family with a $50,000 income will have an extra $625 a year in their pocket.

The state will now have less income tax revenue with which to pay its bills – a fact that Gov.-elect Bruce Rauner must factor into his budgetary plans.

In 2011, the temporary income tax hike was billed as a way to rescue Illinois’ finances. Its extra $7 billion shot of revenue each year was supposed to help the state pay its unpaid bills and right the financial ship. But matched against rising annual public pension payments, which reached $7.8 billion in fiscal year 2014, the “rescue” failed.

And, in the wake of a judicial ruling that declared the Legislature’s December 2013 pension reform bill unconstitutional, pension payments will likely continue to increase.

To Rauner’s incoming budget director, whoever that person is, the state’s prospects might look bleak.

The authors of “Fixing Illinois” devote Chapter 2, “Fixing Past Budgeting Sins,” to this problem. Jim Nowlan and Tom Johnson point out many opportunities for the state to improve the way it manages its money, as well as how it takes in and spends money.

The authors describe how the state has had a “structural deficit” in its budget since 2000. Borrowing and one-time revenue infusions, such as selling a state asset, helped cover the structural deficit, but those practices led to the state’s current massive indebtedness.

Nowlan and Johnson call on Illinois to simply reduce its spending increases to below the rate of inflation, and increase its revenue to above the rate of inflation.

The state historically relies on boosting revenue through tax rate increases, such as the temporary 4-year income tax hike that is about to expire.

Nowlan and Johnson argue for “an appropriate revenue system” for the state, which could include broadening the revenue base through taxes set at low rates, lessening exemptions and exclusions, instituting a sales tax on services, and eliminating the 5 percent tax credit against state income taxes for real estate taxes paid (which in itself represents half a billion dollars in lost revenue to the state).

Working with the Legislature, the incoming Rauner administration must get a better handle on the state’s financial situation and take intelligent action to improve it.

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