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A split over the future of the temporary income tax increase provides one of the starkest differences between Gov. Pat Quinn and Republican Bruce Rauner in the 2014 campaign for governor. Quinn believes the income tax increase should be made permanent. Rauner thinks income tax rates should be rolled back to their pre-tax hike levels — eventually. But the fate of the income tax increase isn’t the only tax issue raised by the two this year. Here’s a rundown.
There is agreement the temporary state income tax increase has produced billions of dollars in additional revenue for the state. Whether the state can live without that additional revenue is the issue.
Quinn said the state needs the money and wants to make the tax hike permanent. That means continuing an individual income tax rate of 5 percent and a corporate rate of 7 percent. Before the income tax was increased in 2011, the individual rate stood at 3 percent and the corporate rate at 4.8 percent. (Corporations also pay a 2.5 percent personal property replacement tax, which is distributed to local governments).
After initially saying the income tax should be allowed to expire as it is currently set in state law, Rauner now says that the rates should return to their pre-tax hike levels during his first four-year term in office. Rauner’s campaign said last week that he would be “thrilled” to have the rate drop to 3.75 percent next year, but the ultimate goal is to eliminate the increase entirely over four years. He’s not specified how that will happen, only that he will work with the legislature to determine that.
Unless current state law is changed, both rates are scheduled to drop on Jan. 1. The individual rate will drop to 3.75 percent while the corporate rate will drop to 5.25 percent. Under current law, those rates will stay the same until 2025 when they drop to 3.25 percent for individuals and 4.8 percent for corporations.
Quinn wants the legislature to act so that the rates will not drop on Jan. 1.
“The truth is maintaining the income tax rate we have now and putting in targeted tax relief, that is a responsible way to go forward and pay our bills,” Quinn said at The State Journal-Register’s editorial board last week. “We’ll have that debate November 19, the next time the legislature comes in.”
According to the General Assembly’s bi-partisan Commission on Government Forecasting and Accountability, because of the drop in rates on Jan. 1, the income tax increase will bring in about $5.8 billion this budget year, or $2.1 billion less than it did in the fiscal year that ended June 30. COGFA said that during the last full fiscal year, the tax increase brought in nearly $7.9 billion in revenue. The original tax rates produced about $12 billion that same year.
Next year, when the tax cuts are in effect for a full year, the scaled back tax hike is projected to bring in just over $3 billion, or $4.8 billion less than a year earlier.
The Center for Budget and Tax Accountability issued an analysis earlier this month that was highly critical of Rauner’s Jobs and Growth Agenda plan. The organization, which receives about 40 percent of its funding from organized labor, said the plan “simply does not add up.” It also said the loss in revenue to the state next year if tax rates are rolled back to their pre-tax hike levels would be $7.8 billion.
Quinn said that loss in revenue will force “savage” cuts to education and other state services. Rauner’s fiscal plan outlines additional money that could be raised from extending the sales tax to some services and economic development incentives that he said will grow the economy and consequently tax revenues.
However, if he is open to keeping a larger portion of the tax hike in place longer, the loss of revenue will not be as great.
Both Rauner and Quinn want to appear they are doing something about providing relief from property taxes, arguably the most unpopular tax among voters.
Quinn proposed a plan last year to give property owners a $500 check from the state to help offset their property taxes. As part of that, the state would end the state income tax credit people receive for paying property taxes.
For most people, it would have meant more money. A household needs to pay $10,000 in property taxes in order to obtain a $500 state income tax credit. That only affects about 180,000 households.
Quinn proposed the plan in his March budget speech. It was barely heard of again and did not pass the legislature.
Quinn has charged that Rauner’s plan to phase out the income tax increase will push higher costs onto local governments and consequently force them to raise property taxes.
Rauner has run ads promising to freeze property taxes and not allow them to increase without voter approval. However, Rauner has not provided details of how that would work and because of the complexity of property taxes, a freeze can mean different things depending on how it is applied. Freezing the tax rate a district charges still could result in higher tax bills if property values increase. Freezing the total amount a district can collect from property taxes could mean districts can’t gain additional revenue as property values increase or new development occurs in a taxing district.
The legislature has already passed the property tax extension limitation law that allows voters in counties to impose an annual limit on property tax increases. Further restrictions on property taxes would also have to be approved by the General Assembly.
Rauner has proposed “modernizing” the state sales tax to make an additional number of services subject to the state sales tax. This is not a new idea. As services have become a larger part of the economy — as opposed to sales of tangible items like appliances or furniture— many states have expanded their sales tax base to include some services in order to generate additional revenue. Rauner’s plan cited a 2011 U.S. Bureau of Economic Analysis study showing nearly 67 percent of personal consumption dollars were spent on services and only 33 percent on goods.
Rauner outlined 32 services that he estimated could generate $603 million for the state. He said the money could be used to partially offset the loss of revenue from rolling back the income tax increase.
The list of services covers items that Rauner said are non-essentials. It exempts things like medical services, day care services and haircuts. It includes things likes legal services — the largest revenue generator on the list — printing, advertising agency services, travel agencies and custom computer programming.
Quinn is opposed to expanding the sales tax to services.
“His revenue proposal is a service tax on things like garbage pickup, taxing someone who is using a lawyer to adopt a child or prepare a will,” Quinn said. “I don’t think that is in anyway enough to pay the bills and it’s not fair anyhow. Shifting the burden to ordinary people who live from check to check and have modest incomes is not right.”
Quinn service taxes are regressive because they are not based on ability to pay.
A 2011 COGFA study found Illinois taxes 17 services while the average state taxes 56. The same study found Wisconsin taxed 76 services, Iowa 94, Missouri 26, and Indiana 24.
However, the report also noted “the taxation of services is often strongly opposed by business groups that would be taxed under any new legislation. These groups have proven to be effective at blocking the taxation of services due to their high degree of organization and political connections. This is one reason that the broad taxation of services has not been approved over the last 15 years and a more piecemeal taxation of services has occurred throughout the country.”
Graduated income tax
Quinn also wants to bring a graduated income tax to the state where higher incomes are subject to higher tax rates. It is the system in use for federal taxes.
Such a change would require a change in the state Constitution which now stipulates a flat tax for all income levels. Lawmakers last spring flirted with a proposal to put a proposed graduated income tax amendment on the ballot. However, the effort failed to get enough votes.
There are 43 states with an income tax. Of those, 34 have a graduated tax system and nine, including Illinois, have a flat tax.
Asked about Rauner’s position on a graduated income tax, campaign spokesman Mike Schrimpf said Rauner’s views on taxes are contained in his Jobs and Growth Agenda position paper. The paper does not specifically address the graduated income tax.
However, in a March debate among Republican primary candidates on WTTW in Chicago, Rauner said he is opposed to a graduated income tax.