Tuesday, September 9, 2014

An Analysis of Patrick Quinn’s Proposed FY2015 Illinois General Fund Budget from the Center for Tax and Budget Accountability



RELEASED: May 19, 2014

Why, on March 26, 2014, did Governor Pat Quinn make the unusual move of introducing two different proposals for the fiscal year (FY) 2015 General Fund budget? The answer is simple. The Governor proposed two very different spending plans because the state faces two very different potential fiscal realities in FY2015. That is because both of the temporary state income tax increases that became law under the Taxpayer Accountability and Budget Stabilization Act of 2011 (TABSA)  are scheduled to begin phasing down this coming fiscal year. 

Under TABSA, the personal income tax rate will decline from 5 percent to 3.75 percent, and the corporate income tax rate will drop from 7 percent to 5.25 percent on January 1, 2015, halfway through the fiscal year. Collectively, those rate reductions will cause the state to realize a loss of $2 billion in revenue from FY2014 levels.  

Given Illinois’ already shaky fiscal condition, that loss of revenue will be impossible for the state’s General Fund to absorb without significantly reducing FY2015 spending on core services from FY2014 levels. Here is why: before losing the revenue from the phase down of the temporary tax increases, Illinois already has an accumulated deficit of $6.8 billion. That is roughly 27.8 percent of total FY2014 spending on the core services of education, healthcare, human services, and public safety, which collectively account for 90 percent of all FY2014 General Fund appropriations. Illinois has that significant accumulated deficit despite the new revenue generated by the temporary tax increases (personal and corporate) that passed under TABSA, and the $4.7 billion in service cuts made over the last five years.  So if the temporary tax increases are in fact allowed to phase out, the Governor will have no choice but to implement significant spending cuts.

That somber fiscal reality led the Governor to introduce two different spending proposals for FY2015. The first, which is the Governor’s “Recommended Budget,” is built on the assumption that rather than be allowed to phase down, the income tax rate increases passed under TABSA are either extended or made permanent. The second is a “Doomsday Budget” in which the Governor identifies the type of significant cuts—particularly funding for education and human services—that would have to be made if the temporary tax increases are allowed to phase down as currently provided in TABSA. 





Quinn’s Doomsday Budget proposal would slash spending by $1.5 billion and negatively impact Illinois families and students.


“The Center for Tax and Budget Accountability (CTBA) released a report, Analysis of the Proposed FY2015 Illinois General Fund Budget, which provides a detailed analysis of Governor Pat Quinn's two very different proposals for the FY2015 General Fund budget – a Recommended Budget and a Doomsday Budget. This unconventional approach to the FY2015 budget was forced on the Governor because of the scheduled phase down of the temporary tax increases in the State's personal and corporate income tax rates that became effective in 2011.

“‘What people don't realize is that none of the new revenue generated by those temporary tax increases has been used to support new or increased spending on services,’ said Ralph Martire, Executive Director of CTBA. ‘Indeed, all net revenue in the General Fund growth since the temporary tax increases became effective in FY2011 has been used for just two things: paying past due bills and covering the growth in the state's nondiscretionary spending on hard costs like debt service payments to bond holders and other legally required transfers, which have more than tripled since FY2009.’

“In fact, spending on core services like education, healthcare, human services, and public safety has been cut by $1.2 billion since the temporary tax increases were implemented in FY2011 and cut by $4.7 billion in nominal, non-inflation adjusted dollars since FY2009.

“If the state's personal (from 5 percent to 3.75 percent) and corporate (from 7 percent to 4.8 percent) income tax rates are allowed to phase down, in FY2015 the state will have $2 billion less in General Fund revenue that it did in FY2014.

“Given this fiscal reality, Governor Quinn opted to introduce two different budget proposals for FY2015. The Governor's Recommended Budget is built on the assumption that the temporary income tax rate increases are made permanent. The Doomsday Budget, on the other hand, identifies the type of significant cuts—particularly funding for education and human services—that would have to be made if the temporary tax increases are allowed to phase down.   

“‘Allowing the temporary tax increases to sunset will mean the state will have no option but to continue the trend of cutting spending on core services,’ said Amanda Kass, CTBA's Budget Director and Pension Specialist. ‘Since $9 out of every $10 spent on current services through the General Fund goes to education, healthcare, human services, and public safety, spending cuts necessitated by the loss of revenue would have to be made to one or more of those core services.’

“CTBA's analysis found that if the temporary tax increases are made permanent, FY2015 spending on core services will increase by $1.4 billion in nominal dollars from FY2014, with the largest percentage increases going to human services (13.3 percent) and early education (8.3 percent).

“Additionally, CTBA's report shows that without the increased revenue from the temporary tax increases, Illinois' accumulated deficit would have been $32 billion this year, which is nearly equal to the entire General Fund budget for FY2014.

Among other key findings in the report:
  • All net General Fund revenue growth over the FY2011-FY2014 sequence was used to reduce the accumulation of back due bills in the state's General Fund by $4.7 billion while covering the $2.7 billion growth in non-discretionary hard costs.
  • The phase out of the temporary tax increases are scheduled to begin midway through FY2015 which will result in the General Fund losing a total of $2 billion in revenue from FY2014 levels.
  • The accumulated General Fund deficit is currently $6.8 billion. Without dramatic spending cuts to current services, the $2 billion in lost revenue from the phase out of the temporary tax increases would balloon the accumulated deficit to $8.8 billion or 36 percent of all spending on current services in FY2014.
  • If the temporary tax increases phase down as scheduled, overall spending on services in FY2015 will be cut by $1.5 billion from FY2014 levels. Nearly every major service category of the budget will be cut significantly from FY2014 levels with public safety cut by 18.6 percent, human services cut by 12.5 percent, higher education cut by 12.4 percent, K-12 education cut by 9.6 percent, and early education cut by 6 percent.
  • When considered over the long term, under both the Recommended and Doomsday Budgets, spending on services is declining in real, inflation-adjusted terms. After accounting for inflation, spending on services in FY2015 under the Recommended Budget would be 23.4 percent less than FY2000. Under the Doomsday Budget, spending on services in FY2015 would be 33.2 less than in FY2000 in real, inflation-adjusted dollars…”
For the complete report, Click Here.

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