PI Original Adam Doster Wednesday January 12th, 2011, 11:11am

Democrats Take "Monumental First Step" To Fix State Budget Crisis

Illinois lawmakers have finally taken decisive action to begin filling the state's budget gap, a move progressives are calling "a monumental first step."

Illlinois' multi-billion dollar budget gap has dominated political life in Springfield since the national recession took hold three years ago. Just hours before the 96th General Assembly adjourned for good, Democrats finally took decisive action to begin filling the hole.

In the wee hours of the morning today, both chambers approved (by razor-thin margins) legislation (SB 2505) to raise the state's personal and corporate income tax rate. It's the first time in 21 years that lawmakers have increased the income tax, which was the lowest in the nation for states that impose such a levy. The final agreement will boost the personal tax rate from 3 percent to 5 percent and the corporate rate from 4.8 percent to 7 percent, changes that will bring in roughly $6.5 billion in new revenue over the next year. (The full increase will last four years before dropping to 3.75 percent and 5.25 percent, respectively.)

"The tax package itself is absolutely essential," says John Bouman, president of the Sargent Shriver National Center on Poverty Law. "It's like water in the desert for many of these struggling organizations and providers." Gov. Pat Quinn, who is expected to sign the bill, agreed. "We were happy that the Senate voted that way and the House did too," he told reporters late last night.

The final budget stabilization package was stripped down significantly from the deal legislative leaders initially struck late last week. A provision that would have provided property tax relief to many Illinois homeowners was ultimately taken out. A companion bill that would have increased the state's cigarette tax and earmarked the revenue ($377 million per year) for schools went down in flames in the lower chamber by nine votes.

While the State Senate, with Republican assistance, ultimately passed a $3.7 billion borrowing bill (SB 3514) to pay this year's required pension contribution, lawmakers also balked on a larger $8 billion borrowing package (SB 336) favored by Quinn that would have been used to erase the state's backlog of bills immediately. And Democrats agreed to implement a hard, temporary annual spending cap of 2 percent; if the state's Auditor General finds that expenditures in one year increased by more than the cap, and lawmakers don't trim their budget within 45 days, the tax increase would be rescinded.

State Rep. Lou Lang (D-Skokie), the deputy majority whip, told WLS' Don Wade and Roma that he believes the Democrats acted responsibly. Listen (the full clip is available here):

To be sure, the budget crisis will not end overnight. It's helpful to think of the Illinois deficit as consisting of two distinct problems. Roughly half of the gap is made up of late payments to schools, social service providers, and other state vendors. (When the economy tanked, Illinois just stopped paying its bills on time.) Comptroller Dan Hynes reports that Illinois has accrued $4.577 billion in unpaid vouchers at the half-way point of this fiscal year, a number that will grow over the next few months.

The other half of the state's budget gap, currently about $6.5 billion, is structural. That's the difference between what Illinois takes in and spends annually. The state's regressive and outdated tax system just does not generate enough revenue to pay for the vital services that the public demands. Each and every year, dating back to the early 1990s, lawmakers have faced the same, recurring hole.

Without the immediate infusion of borrowed cash, lawmakers must rely on the new tax revenue to reimburse strained social service providers. That money could take months to trickle into the state's coffers and then funnel back out in the form of checks. Sean Noble, policy director for Voices for Illinois Children, called the inevitable reimbursement delay "very troubling."

Once those bills are finally paid, the additional money will fill the structural hole."Without the bonding, it's going to take a couple of years to get the fiscal house in order," says Ralph Martire, director of the Center for Tax and Budget Accountability, which has been advocating in favor of a two-percentage-point hike for almost a decade.

Of course, the problem will likely reappear once the tax rates drop back down in 2015 -- unless the state cuts even deeper into its already-rickety spending plan. And this deal as constructed does not provide any relief to low-income and working-class taxpayers, who are already severely overburdened by the Illinois tax code. (In FY 2007, for example, Illinois' poorest 20 percent paid an average of 13 percent of their annual income in state and local taxes while the wealthiest 1 percent of earners paid just 4.1 percent.)

In this economic and political climate, though, getting any revenue bill passed is nothing short of miraculous. "While it's very nip and tuck," says Bouman, "this is the way [the legislation] needed to look in order to pass." Martire says Senate President John Cullerton (D-Chicago) and members of the Legislative Black Caucus deserve special consideration for their leadership over the past two years. "They really stepped to the plate," he added.

Still, progressives that want a tax system that's modern and fair will have a lot of fighting ahead of them. As organizers with the Responsible Budget Coalition wrote this morning, it's "a monumental first step."

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