State budget and spending issues are expected to dominate the coming legislative session as the New Year begins.
While Governor Pat Quinn will not release his budget until February, lawmakers and the public will get a preview of the state’s revenue and spending picture when the Governor’s Office of Management and Budget releases its annual three-year projections. A law adopted in 2010 requires the Governor’s budget agency to release projections every January.
Tax Hike to Expire in 2015
Those projections will be under close scrutiny this year because major portions of a 67% income tax hike adopted in 2011 are set to expire in January 2015, midway through the coming fiscal year. The Governor must submit a budget to the General Assembly that is based only on revenues that are already on the books. Governor Quinn will have to account for how he hopes to balance the state budget when the income tax rolls back.
The 2011 tax hike was adopted during a lame-duck legislative session with no Republicans voting for the increase. Almost from the day it was passed, Republican lawmakers have warned that the Governor and his legislative allies were not making the kinds of budget decisions that would allow the tax hike to roll back.
A major bipartisan pension reform adopted in December could save $1.2 billion to $1.5 billion in its first year; however, that would still be less than the revenues the state will lose when the tax hike expires. Also, because the pension reforms are likely to be challenged in court, it is uncertain when those savings may actually be realized.
Lines Drawn: Spending Cuts or Higher Taxes
The lines are already being drawn, with Republican lawmakers likely to focus on spending cuts, and Democrats championing a change in the state Constitution that would allow them to impose a graduated tax in Illinois, instead of the current flat rate tax.
Opponents of a graduated income tax have been skeptical of claims that a majority of taxpayers would see their income taxes go down under such a scheme. They point out that the legislation placing a graduated income tax on the ballot does nothing to define what the actual tax rates would be.
They also say that the record in other states that have a graduated tax shows that the rates are actually much higher than in Illinois for most middle-income taxpayers. Many say that they could not consider a graduated income tax without knowing the actual tax rates.
Controlling Medicaid Spending Critical
A key focus of budget cutting is likely to be the state’s burgeoning Medicaid program, which absorbs the largest portion of the state budget. Budget conservatives say it is impossible to achieve any significant spending savings without reducing Medicaid costs. In recent weeks, two of the legislature’s top Medicaid experts have raised concerns that the Quinn Administration has been negotiating side agreements with the state’s public employee unions that will undercut bipartisan reforms adopted in 2012.
Lawmakers are also concerned that the state’s open-armed embrace of the federal Affordable Care Act (commonly called Obamacare) will eventually force state taxpayers to absorb ever-higher spending increases. Although the federal government has pledged to pick up most costs of the Affordable Care Act, fiscal conservatives fear the expiration of those pledges will result in a massive transfer of costs to state government. They point out that the United States Supreme Court ruling on the Affordable Care Act allowed states to opt out of benefit increases, and say Illinois should have more carefully considered what benefits to offer.
School Funding Fairness
Another issue with major spending implications is an examination of the state’s system of allocating school-aid dollars. A bipartisan Senate committee has been traveling the state looking at discrepancies in school funding and also examining changes that have occurred in the past decade in which a smaller percentage of state school-aid dollars are going to basic education, while more and more dollars are headed for targeted programs that often benefit specific school districts, most notably the Chicago Public Schools, at the expense of other districts.
Pension reform has been a major concern for the past several years; however, with that issue at least temporarily taken off the table, these issues could dominate much of the debate when the legislature reconvenes for its annual session as scheduled for January 29.