Tax Policy and the Race for the Governor’s Mansion: Illinois Edition

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Illinois.

The outcome of the Governor’s race in Illinois will have major  and immediate implications on the state’s ability to provide adequate funding for education, health care, transportation and other important services.  The context for this heated race is especially important. The state currently has one of the nation’s most regressive tax systems, applying the same income tax rate to minimum wage workers and millionaires. To make matters even worse, the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in January leaving the state with a $2 billion budget gap.

This year Illinois lawmakers adjourned without making the temporary income tax rate hike permanent.  The legislature also failed to enact legislation that would have allowed Illinois voters to weigh in on a ballot question in November that would amend the state’s constitution to allow a graduated income tax.  Yet, the budget passed assumes the higher 5 percent rate is allowed to continue and leads Illinois down the path of deeper program cuts if lawmakers cannot agree  to increase the rate by the end of the year.  It’s largely agreed that the budget Governor Pat Quinn signed into law was the equivalent of “kicking the can down the road” and that election year politics got in the way, with lawmakers not wanting to cast tough votes in favor of maintaining current tax rates ahead of November.   According to the Fiscal Policy Center at Voices for Illinois Children, the budget was also balanced “by borrowing and by underfunding existing obligations, which will further add to the state’s backlog of unpaid bills.”

Given this backdrop the choice between Governor Quinn and businessman Bruce Rauner couldn’t be more stark. Quinn has said that he supports making the temporary 5 percent income tax rate hike permanent. In his 2014 budget address he stressed the harm that will come if the income tax rate is allowed to expire and new revenue isn’t raised, “mass teacher layoffs, larger class sizes and higher property taxes.” Quinn has gone beyond saying that the income tax rate should be 5 percent-  he’s also been a long-time supporter of a graduated income tax.

Rauner initially proposed allowing the temporary income tax hike to immediately expire, but he changed his position once the reality set in that as governor he would need to fill the $2 billion hole created in the budget once the rate hike expired. More recently Rauner has said that he will allow the temporary tax increase to expire over four years and will keep property taxes at their current level. Rauner would make up $600 million of lost income tax revenue by broadening the sales tax base to include many business services like advertising, printing and attorney fees. Sales tax base broadening makes good sense in terms of modernizing a state’s tax structure and making it more sustainable over the long term. But Rauner’s plan is regressive and taxing business to business services is problematic. For more on applying the sales tax to services, read this ITEP brief. Stay tuned. This gubernatorial race is one to watch.