Wednesday, April 1, 2009

Daley Puts 'Tax Swap' Concept Back on Table

From Jim Broadway, Publisher, State School News Service

The state's FY 2010 budget challenges just became even more complicated. For decades, all experts and blue-ribbon commissions studying how Illinois citizens pay for public services have arrived at the same conclusion: We rely too heavily on property taxes and not enough on state general revenue source, mainly the income tax. This imbalance cripples public services, mostly schools, where property values are low and over-burdens taxpayers where they are high.

As consequences, for example, at least one-third of Illinois schoolchildren are educated in cash strapped schools unable to meet their basic needs, while hundreds of thousands of moderate-income residents in high-property value areas are being taxed out of their homes. All experts' recommendations have called for a "tax swap" - lower property taxes and higher state taxes.

But that takes state action, and state officials are reluctant. For all the good property tax relief would do, they know they would not get credit for that; instead, they would just take the blame for the higher state taxes needed to make it possible. Thus, to address the state fiscal black hole confronting the state in the coming FY 2010, Gov. Pat Quinn has proposed a relatively small 1.5-percentage point increase in the state income tax - and no tax swap.

Combined with federal stimulus money, that would close the $11.5 billion state deficit and put the state on a strong footing to fund state obligations in coming years. But it would do nothing for property taxpayers, and Chicago Mayor Richard Daley says it is "unacceptable." He also objects to Quinn's plan to keep all revenue from his tax increase at the state level rather than sharing 10% of it with local governments as has been the law for decades.

Daley is just one more voice in the policy process, but his is a very powerful voice. With a quarter of the legislators representing his community, he exerts a huge influence on state policy. His position on the tax structure cannot be ignored.

What would it cost to add a tax-swap and maintain state-local revenue sharing in Quinn's budget?

The tax-swap alone would require about $3 billion in state funds. Let's guess the total impact of Daley's demands at about $3.5 billion. According to the most recent information on state tax proceeds [see pp. 54-62] it seems the state income tax on individuals would have to rise by 2 points, with a proportionate hike for corporations, for Daley to have his way.

That would seem to make a tax increase all but impossible to pass. But a letter is circulating now indicating that its signers will be reluctant to support any budget that does not include the tax swap Daley demands. Who signed that letter? - about 30 members of the Illinois Senate.

Complicating the argument is the fact that school leaders in areas with a huge property tax base are not keen on the swap notion. Although the citizens who fund their schools would benefit more than anyone in the state, they see the swap as a risk to their schools' funding. Tax relief for their taxpayers would rely on state funding for abatements. These school officials don't trust the state to keep its promises.

They don't feel state policymakers are very reliable. Imagine that.

At any rate, as they say at the Capitol, it's not soup yet. The legislators will finish out the week debating bills to beat Friday's third-reading deadline. Then they'll take two weeks off. Perhaps they'll confer with constituents. Perhaps they'll go some place and hide, as we all would be tempted to do. But when they return to the Capitol on April 21, they'll face five weeks of fury, more heavy lifting and politically risky votes than they've seen in six years.

Can they suck it up and get the job done by May 31? One way or another, they certainly will.

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