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Illinois Governor’s 2021 Budget Boosts Case for Tax on Rich

By Shruti Date Singh, Bloomberg

Illinois Governor J.B. Pritzker raised the stakes in his push for higher taxes on the wealthy, promising more dollars for education, public safety and pensions in his 2021 budget proposal if voters approve a constitutional amendment to enact a graduated income levy.

The billionaire Democrat delivered his second budget address Wednesday. Spending is forecast at $42 billion for the year that starts July 1, while general fund revenue is projected at $42.1 billion, budget documents show. The revenue estimate includes $1.4 billion if a graduated income tax is approved and will be in reserve until voters sign off on the tax structure.

“Last year we began turning our ship of state in the right direction,” Pritzker said during the speech in Springfield, the state capital. “The budget I propose to you today will build on the steady progress we’ve been making over the last year.”

New revenue is needed in Illinois amid $7.3 billion of unpaid bills and $137 billion of unfunded pension liabilities, a drag on the state’s credit rating. If voters sign off on a constitutional amendment that shifts Illinois from a flat to a graduated income tax, the higher levies on those earning more than $250,000 is forecast to bring in $3.6 billion annually in the first full year, according to estimates from Pritzker’s administration.

Pension Funding

In his 2021 budget, Pritzker plans to fully fund the state’s certified pension contribution of $8.6 billion. If the graduated income tax goes through, an additional $100 million would go to pay down the state’s pension costs, he said.

“Next year would be the first year in state history that we will make a pension payment over and above what is required in statute,” Pritzker said.

The state would also put that additional revenue from the income levy toward spending on education, health services and public safety, he said. Some of that additional spending is contingent on the new revenue though.

“We cannot responsibly spend for these priorities until we know with certainty what the state’s revenue picture will be,” Pritzker said.

Even without the passage of the new tax structure, state revenue in fiscal year 2021 is projected to get a boost from higher collections of income taxes and $46 million from adult-use recreational cannabis sales, which was legalized on Jan. 1, budget documents show. About $10 million of the tax revenue from cannabis will go toward the bill backlog, which on Dec. 31 was about $7 billion, down from $7.9 billion a year earlier, according to the state.

“The foundation of this budget is not on solid footing,” Illinois Senate Republican Leader Bill Brady said in an interview after Pritzker’s speech. The governor is basing at least part of the revenue projections on a tax rate increase that voters haven’t signed off on, said Brady, who doesn’t support the higher levy.

“I think that’s the wrong way to go about it,” he said. “If voters choose not to go that direction, it leaves a hole in his budget. Therefore, we are worried and concerned.”

Given the vote is still months away and the outcome is unknown, working through the budgetary process will be a “delicate dance,” said Representative Mike Zalewski, who heads the Illinois House Revenue Committee.

Illinois House Republican Leader Jim Durkin said higher taxes aren’t needed. He cited the recent improvements in the state’s finances, higher revenue already coming in, economic growth and low unemployment.

Infrastructure Spending

Pritzker’s budget priorities also include reforming Illinois’s criminal justice system. His administration started a six-year $45 billion Rebuild Illinois infrastructure program in fiscal 2020. Pritzker wants to improve the competitiveness of Illinois, which has seen its population decrease in recent years, he said.

The state’s gambling expansion could also be a source of revenue for the state and its municipalities in future years. Chicago Mayor Lori Lightfoot was in Springfield on Tuesday advocating for a change in tax structure for a potential Chicago casino.

Pritzker said his office is working with Chicago and lawmakers “to make a much needed adjustment in the legislation passed last spring to help make sure the Chicago casino is a success that will help fund projects throughout our state.”

Investors have applauded Pritzker’s steps to improve the state’s finances, and want action taken on the pension debt. Illinois bond yields have fallen relative to benchmark securities, in part because of the state’s fiscal progress.

“The future improvements in the state credit will continue to depend upon increasing pension funding, improving the balance sheet and finding more sources of taxes,” Dan Solender, head of municipal debt at Lord, Abbett & Co., which manages $28 billion in the securities, said in an email after Pritzker’s speech. “Overall, he said a lot of the right things” such as paying down bills and funding the state’s pension system “but now he needs to follow through,” he said.

Blagojevich Commutation

Pritzker’s budget address came one day after President Donald Trump announced that he commuted the prison sentence of former Illinois Governor Rod Blagojevich who was convicted of public corruption. Despite the media frenzy around his release, Brady, the state senate’s Republican leader, said the focus is on the state’s fiscal issues.

“The president made his decision,” Brady said. “I have more faith in the judicial system and think they probably acted appropriately particularly since it was appealed. Today, for us, the important thing is how we work toward meeting the financial needs of the people of Illinois.”

This article originally appeared in Bloomberg.

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