Illinois Calls Special Legislative Session in Final Attempt to Prevent Fiscal Disaster

For the last two years, Illinois has been operating without a budget, as Republican Governor Bruce Rauner and the Democrat-controlled legislature have not agreed on how to handle the state’s spiraling budget crisis. On May 31, the state crossed a crucial budget deadline that will now require a three-fifths majority to approve any further budget deals. This news led Standard and Poors to cut Illinois’ worst-in-the-nation credit rating even further, which is expected to raise its debt payments significantly.

As Illinois faces a third year with a massive deficit and no budget, Governor Rauner called a special legislative session that began June 20 and ends this Friday, in a final attempt to get a deal before the start of a new fiscal year in July. Governor Rauner and Senate Republicans have recently rallied around a new budget proposal, which features the following key provisions:

• Property Tax: A four-year freeze in the state’s property taxes, which are set by localities at an average rate of 2.25 percent and are estimated to be the second highest in the country. Under this freeze, any changes in property tax revenue must be approved by local referendum.
• Individual Income Tax: A four-year increase in Illinois’ individual income tax from 3.75 percent to 4.95 percent. This is less than the previous temporary tax increase to 5 percent from 2011 to 2015, in place when Governor Rauner took office.
• Corporate Income Tax: A four-year increase in the state’s corporate income tax from 5.25 percent to 7 percent. This does not include the state’s 2.5 percent personal property tax replacement add-on, bringing the total corporate income tax rate under the proposal to 9.5 percent, fourth highest in the country.
• Sales Tax: A broader base for the state’s 6.25 percent sales tax. The tax would now apply to satellite television and online streaming services such as Netflix, as well as a few miscellaneous services such as tattooing and dry cleaning.

This plan is intended as a compromise with the Democrat-led Senate, and mirrors many of the provisions of a bill adopted by the Senate toward the end of the last regular session. It differs primarily on the question of permanence: under the Republican proposal, tax hikes would sunset after a few years, whereas the Democratic plan would make them permanent. Democrats would have the property tax freeze limited to two years, while Republicans would extend it to four.

While resolving the budget issue would arguably improve economic conditions in Illinois overall, these changes are projected to make Illinois’ tax structure less competitive, and would cause the state to drop from 23rd to 28th on our State Business Tax Climate Index.

Even if the Senate reaches a compromise with the governor, many observers are concerned that the Democrat-led House could reject the bill, as it is widely seen as less open to compromise. As the state’s financial health and government services continue to decline, a third year without a budget would be devastating for Illinois and its residents.